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Senate back at student loans as pressure and rates mount, but deal elusive

A key student loan rate doubled last week after Congress refused to act, but the majority Democrats in the Senate are split and the party leadership is looking for a short-term fix.

Back from its one-week July 4 recess, the Senate is zeroing in on student loans Wednesday, poised to take up bills addressing the interest rates on subsidized federal loans after a key rate doubled last week.

After Congress refused to act last month, the rate borrowers pay on subsidized Stafford loans – which make up about 40 percent of federal education loans – doubled from 3.4 percent to 6.8 percent on July 1.

Pressure is now mounting on Congress to come up with a fix before many student loans are issued later this summer, but the various sides appear unable to come together – even though they’re not too far apart on what they seem to want.

Even the measure passed by House Republicans in May, which is criticized by most Democrats, isn’t too far from the plan in President Obama’s budget proposal. Both call for a long-term fix that would peg the interest rate to US Treasury borrowing rates.

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Within Senate Democratic ranks, meanwhile, there is a strong split – epitomized Tuesday by dueling news conferences held by different factions of the party after a closed-door lunch.

Some Senate Democrats, including Joe Manchin of West Virginia and Thomas Carper of Delaware, along with Angus King of Maine, an Independent who caucuses with the Democrats, touted the bipartisan solution they’ve been pushing, which differs from the House Republican plan but which also would peg interest rates to the 10-year Treasury rate.

But Senate majority leader Harry Reid and other top Democrats criticized that solution as well as the one from House Republicans.

“Speaker Boehner says the House has acted and the ball is in the Senate’s court. But Democrats can’t support a plan that would be worse for students than doing nothing at all,” Senator Reid said in remarks on the Senate floor on Tuesday.

Reid and many other Senate Democrats favor once again passing a short-term fix – extending the 3.4 percent rate one more year, which they would pay for by changing some tax rules on certain retirement accounts.

They say such a short-term solution would enable them to focus on deeper, more systemic problems and long-term solutions to college affordability in the fall, when they take up the Higher Education Act. Others see it as Congress once again punting a thorny issue down the road rather than addressing it.

“Why should we have a political one-year fix for 2 million students and leave 9 million more paying rates that are higher than they should, 7 million of them middle-income students?” asked Sen. Lamar Alexander (R) of Tennessee, speaking to reporters after the lunch Tuesday. He was referring to the fact that the one-year extension would apply only to subsidized loans, while the bipartisan solution he supports would also lower interest rates, at least in the short term, for students getting unsubsidized federal loans as well.

Some college finance experts say a short-term solution is unlikely to really encourage Congress to address bigger issues in the fall.

“If they push this off to the Higher Education Act reauthorization, then this issue will again dominate the conversation, and there are many other issues lawmakers need to tackle,” says Jason Delisle, director of the Federal Education Budget Project for the New America Foundation, who hopes Congress will come up with a long-term solution for government-issued education loans.

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“We’re not going to come up with anything different in the next year. We know what’s out there,” he says. If it gets put off another year, Mr. Delisle adds, “we’re going to spend another year debating the exact same options on the table” that are there now.

Current options facing Congress include:

• The proposal already passed by House Republicans, which would tie interest rates to the 10-year US Treasury borrowing rate plus 2.5 percent for all Stafford loans and 4.5 percent for all PLUS loans. Rates would vary with the market, but Stafford interest rates would be capped at 8.5 percent, and PLUS loan rates would be capped at 10.5 percent.

• The bipartisan Senate proposal, which would peg loan rates to the 10-year Treasury rate plus 1.85 percent for Stafford undergraduate loans, 3.4 percent for Stafford graduate loans, and 4.4 percent for PLUS loans. The rates would be locked in for the life of the loan. While there would be no cap, the consolidation rate for loans would be 8.25 percent.

• The proposal favored by Reid, Sen. Tom Harkin of Iowa, and most other prominent Senate Democrats, which would extend the current (until it expired) 3.4 percent rate on subsidized Stafford loans one more year, and would not change the interest rates for unsubsidized Stafford loans or PLUS loans.

Reid, Senator Harkin, and other Democrats have criticized both plans to peg the rates to treasuries, saying they would rather see the current rates double than endorse a solution they suspect will be worse for students in the long term, and they seem unlikely to budge. They’ve criticized the bipartisan plan for not having caps, and they say it could leave future students vulnerable to high rates if borrowing rates go up significantly.

But talk of no caps on interest rates, says Delisle of New America, is somewhat disingenuous given that students will still be able to consolidate loans at 8.25 percent – one way to bring loans down – and will also have the option to cap payments on the basis of income.

“Which would you rather have, an interest rate cap or a payment cap?” Delisle asks. “The payment cap is better, and that already exists.”

Meanwhile, despite the heated debate and party schisms that the student loan interest rate is causing, higher education experts note that it’s really a side show to the bigger issues contributing to college affordability problems – most of which get little attention.

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“We’re letting the students take a bigger and bigger piece of [college costs], and are allowing states to disproportionately cut higher education, and we’re floundering around, looking desperately at small answers to big problems,” says Pat Callan, president of the Higher Education Policy Institute in San Jose, Calif.

Mr. Callan isn’t optimistic that Congress will be able to address those issues on its own, even if it tries, noting that it will take some combination of the federal government working with states to find answers.

“The ideas are so small, and the magnitude of the problem is so huge that it really threatens American competitiveness of the workforce and the opportunities of the next generation, but I don’t see any willingness to have the bigger discussion,” says Callan.

“So yes, we should put a band-aid on [student loan interest rates going up], and yes, it’s important. But if we think we’ve solved any serious long-term problem about the financing of higher education in this country once we’ve done that is to be pretty deluded.”