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May 31, 2013 2:51 PM The Annual Student Loan Interest Rate Fight

By Daniel Luzer

This morning President Obama, in the administration’s annual performance of don’t-change-the-interest-rate-on-student-loans, urged college students to call their Congressional representatives and urge them to keep the interest rate on federally-backed education loans at 3.4 percent.

According to a Huffington Post piece:

President Barack Obama on Friday stepped into the hyper-partisan fight over student debt, warning about the economic dangers posed by rising debt burdens and urging Congress to pass legislation to prevent interest rates on some loans from doubling as a hard deadline looms on July 1.
If Congress and the White House fail to agree, interest rates on subsidized Stafford loans for undergraduate students are set to double from 3.4 to 6.8 percent on July 1 because of the expiration of a 2007 law that had gradually lowered the rate. The hike would affect about one quarter of new federal student loan dollars. The doubled rates would cost affected borrowers, who come from middle- and lower-income households, about $1,000 more over the average 12-year life of each loan.

The current relatively low interest rate comes from a 2007 law, the College Cost Reduction and Access Act, which reduced interest rates to 3.4 percent. The law also had a sunset provision specifying that the rate would spike back up to 6.8 percent. But Congress has been renewing the lower interest rate for years.

Last year President Obama went on “Late Night with Jimmy Fallon” in an effort to keep the rate at 3.4 percent. This year he seems to be passing the buck, telling students to call, tweet, or email their representatives.

Okay fine, great idea. College students should get involved in this to ensure that the rate doesn’t go up. But how long do we have to keep doing this?

This is a minor issue. Despite President Obama spending the majority of his speech talking about the importance of ensuring college access for all Americans and complaining about the escalating cost of college, the interest rate on federally-backed student loans doesn’t impact how many students go to college and does nothing to either escalate or curtail the cost of college.

Obama said of student loans payments that they “can last for years, even decades, which means young people are putting off buying their first car or their first house — the things that grow our economy and create new jobs.” He and the first lady, Obama said, only finished paying off their own loans in 2004.

But the interest rate here applies only to federally subsidized loans, which are set at a maximum $5,550 a year. For a one-year extension, which is all that Obama is proposing, the difference between a 3.4 percent and 6.8 percent interest is, at most, an extra $9 a month. That $9 adds up over many years, but it’s not the difference between buying a house and continuing to rent.

So let’s just set a standard interest rate already. Tie it to the market. Tie it to an arbitrary 2,3, or even 5 percent interest rate. Hell, tie it to the price of milk in Lincoln, Nebraska. It really doesn’t matter. We have much more important things to worry about in college pricing and student debt. Forcing America to go through this performance every year is a waste of time and effort.

The Republicans, to their credit, have proposed a bill that would “allow interest rates on federal student loans to rise or fall from year to year with the government’s cost of borrowing.”

The president characterized the bill as “not smart, not fair” because the GOP plan would be troublesome for student (and government) budgeting. Under the Republican plan if one took out a loan in 2014, when the government rate was 2 percent, one wouldn’t pay the loan back at 2 percent; one would pay the loan back at whatever the market was that year. This means borrowers might pay 7.3 percent one year, and 4.6 percent another year.

The Republican plan would, however, at least take the interest rate setting out 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