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May 10, 2012 5:17 PM An Easy Interest Rate Fix

By Daniel Luzer

As Congress continues to struggle about what to do with the interest rate on Stafford student loans, which will double next month if Congress doesn’t take action, one New American foundation scholar has a proposal to fix problems like this, permanently: Just use a normal interest rate and do away with the synthetic highly politicized thing that we’ve got now.

According to a piece by Jason Delisle:

The Congressional Budget Office has provided a cost estimate for a proposal that 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.

I’ve argued before that the interest rate on federal student loans doesn’t really go very far to ensure college affordability, but as long as we’re going to keep the current system in place, the CBO idea makes a lot of sense.

Why continue to debate the interest rate politically? Let’s just create a structure to make the system sustainable and less subject to the volatility of Congress.

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