CONGRESS HAS ONLY begun working on student loans this year, and already it’s going better than last year’s debacle.
Election-year politics drove Congress and the White House to endorse a bumper-sticker policy — keep loan rates from doubling! — instead of looking at the substance. Lawmakers rushed to extend a 3.4 percent rate on certain new loans instead of allowing the rate to revert back to 6.8 percent. That doesn’t sound bad to borrowers, but it reflects the weird fact that those loan rates aren’t pegged to anything real, just to the whims of Congress, which inevitably uses student loans as political playthings.
This year, President Obama proposed pegging loan rates to the rate at which the government borrows, plus a relatively modest markup. On Thursday, the House Education and the Workforce Committee endorsed a similar policy. Its bill may reach the House floor this week. Other plans are being discussed in the Senate.
Though each plan differs in some important details, the basic point is that rates would reflect economic conditions instead of politics. Under any of the proposals, students — risky borrowers with little-to-no credit history — would still get a tremendous bargain relative to what private lenders would offer. But the size of that interest-rate subsidy wouldn’t unfairly fluctuate with Treasury yields. And generous income-based repayment programs would effectively limit the interest rate many borrowers would face over the course of repayment. Backers of the president’s plan and those behind the House’s say the proposals are designed to be roughly budget-neutral over 10 years. There’s no reason to delay passing such a policy.
Yet these plans are also limited. Interest-rate setting is just the beginning of the debate that lawmakers must have on student borrowing. For example, the Wall Street Journal recently profiled a woman who borrowed more than $300,000 in graduate student loans and used some of it to finance home repairs. But, depending on where she ends up working, she could be eligible for a massive principal and interest amnesty.
Instituting an income-based repayment program is an important piece of the system to ensure that students don’t face crushing debts after graduating. But lawmakers must also fix the kinks that may encourage excessive borrowing with too few restrictions, particularly for those who end up with large incomes.
Rep. John Kline (R-Minn.), chairman of the House education committee, says that these and other issues will be part of a broader discussion Congress will have as it considers reauthorizing the Higher Education Act, which expires the end of this year. For the health of the country’s vaunted college and university system, not to mention the federal budget, lawmakers must maintain their strong start and do some serious policymaking this year.