House Votes to Reduce Rates on Student Loans

Cut in Lender Subsidies Offsets Impact

By Paul Kane Staff Writer
Thursday, January 18, 2007; Page A03

The House overwhelmingly approved a bill yesterday that is designed to cut interest rates on college loans, creating a plan that potentially could save students $2,300 over the course of a loan. But the reduction in rates would be phased in and would not take full effect until 2011, when the legislation would automatically expire unless renewed by Congress.

By a vote of 356 to 71, House Democrats checked off another priority item from their fall campaign as part of a 100-hour march to pass legislative priorities by the close of business this week.

However, even the staunchest supporters of the provision -- which would drop the rate paid on federally subsidized student loans from 6.8 percent to 3.4 percent over five years -- acknowledged that the action was only a small piece of what House Democrats hope to do to reduce the cost of higher education.

"This is a down payment," said Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee.

The Democrats broke into loud applause when the final gavel came down on the vote, the fifth of their "Six for '06" agenda items to pass since the party took over the chamber earlier this month.

But the bill marks an early instance of conflict between two Democratic campaign promises: The interest-rate-reduction measure runs up against a pledge to install strict spending limits known as pay-as-you-go, or pay-go, creating a budgetary restriction on how far the newly empowered caucus can go in keeping its word.

The plan, which won the backing of 124 Republicans, would cost $6 billion over five years, according to congressional estimates. But the reduction would sunset after five years, cutting in half the benefits for borrowers. According to Democratic estimates, the plan could nearly double the $2,300 in savings for borrowers if the rate were left at 3.4 percent into the future.

But a permanent cut of the interest payments would cost billions of dollars more, and Democrats would have had to come up with savings in their spending plans under the newly installed pay-go rules.

However, Democrats are hopeful that, if enacted, the lower interest rates would prove popular and would be extended before 2011.

Rep. Howard P. "Buck" McKeon (Calif.), the ranking Republican on the House Education and Labor Committee, called the plan "flawed legislation" and tried to offer an alternative that would limit the reduced interest rates to college graduates who make $65,000 or less, as well as to active-duty military personnel.

However, as has been the case throughout the 100-hour program, House Speaker Nancy Pelosi (D-Calif.) closed off the minority's ability to offer its alternative, prompting McKeon to complain that the bill's process was "badly flawed."

Republicans said that a college student taking out a loan in the fall of 2011 would save just $7 a month under the plan.

Miller rejected the premise of limiting the reduced rates to borrowers with a $65,000 annual salary, contending that a married couple who serve as public school teachers would probably not qualify and would have to pay the higher rate.

Democrats would pay for the plan by cutting subsidies provided to banks and lenders. Without those subsidies, the lending industry asserts that costs will be passed on to borrowers in the form of higher fees and poorer service.

"They will all have to figure out how to make up for the lost revenues," said Harrison Wadsworth, special counsel to the Consumer Bankers Association. "It costs money to provide good service."

The lending industry is hoping that its allies in the Senate, where the Democratic margin is narrow, would obtain more accommodations to soften the financial blow to lenders. Wadsworth said his association came out against the plan only after Democrats detailed how it would be paid for, calling it "piling on" to cut $6 billion in subsidies.

Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate Health, Education, Labor and Pensions Committee, supports the reduction in interest rates but plans to consider it as part of a broader package of bills to deal with the soaring costs of higher education. In February, Kennedy's committee is expected to take up a plan that will include the reduced interest rates, as well as increasing the Pell grant from $4,050 to $5,100 and limiting student loan payments to 15 percent of a borrower's annual income.

Miller supports those provisions and hopes to bring them up in his panel later this year, but he added that yesterday's action was important legislatively and symbolically because it was a key plank of last fall's Democratic electoral agenda.

"That's what we said we were going to do. That's what this 100 hours is about," he said.

© 2007 The Washington Post Company