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June 08, 2012 3:06 PM A Good Idea to Reform Interest Rates on Student Loans

By Daniel Luzer

Back in May I wrote about a plan created by the New America Foundation’s Jason Delisle to address the student loan interest rate problem. Senators have no proposed a law based on it.

Under current rules the interest rate is set by Congress, which leads to tremendous partisan wrangling every time the existing rate law expires. Delisle’s plan,

would link the interest rate on all newly-issued federal student loans—Subsidized and Unsubsidized Stafford, Graduate and Parent PLUS—to long-term U.S. Treasury borrowing rates. Interest rates would still be fixed for the life of the loan, but the rate would change each year loans are offered based on market rates for Treasury notes. The proposal sets the rate for newly issued loans based on the interest rate on 10-year Treasury notes at the time the loan is issued, and adds a premium of 3 percentage points to it.
That formula would make the rate on loans issued this fall fixed at 4.9 percent, a big drop from the current 6.8 percent rates. What’s more, that rate would be available to all undergraduate and graduate borrowers, unlike the proposal pending in Congress to provide lower rates for only some undergraduates. Of course, next year the rate could be higher or lower depending on what happens to interest rates in the market. The CBO assumes it will be higher. That’s where the deficit reduction (i.e. cost savings) comes in.

Earlier in the week Senators Tom Coburn (R-OK) and Richard Burr (R-NC) introduced the Comprehensive Student Loan Protection Act, S. 3266. The Coburn-Burr bill would set interest rates on all federal student loans to the borrowing rates on 10-year U.S. Treasury notes.

This won’t go very far toward actually making college affordable to American students again, but it would be a damn good law if enacted. There’s no reason to have a bizarre, political debate about this issue every time the rule expires.

This reform would come at no cost to taxpayers.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • Mossup on June 09, 2012 9:35 AM:

    "An argument against this option is that, given CBOs projections of the interest rates on 10-year Treasury notes from 2012 to 2021, the option would raise the expected average interest rate on student and parent loans. Consequently, for most loans, the interest accrued and monthly payments when borrowers left school would be greater than under current policies. The anticipation of higher debt payments might limit the fields of study students would consider and the types of jobs they would seek.

    "Also, borrowers who were in school during times of tight financial markets would pay higher interest rates than borrowers who were in school during other times."

    http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10-reducingthedeficit.pdf

    Page 32 (48 in pdf)