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Minnesota student groups wary of loan interest rate deal

WASHINGTON — The bill would tie rates to the market and cap them in the long-run, but students say they still go too high.

While students taking out loans now will benefit from lower interest rates, advocates worry the Senate deal leaves too much room for rates to rise in the future.

WASHINGTON — Lawmakers from both parties and officials from the White House on down say students are the ultimate winners under a compromise student loan interest rate plan passed by the Senate on Wednesday.

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But some student groups are skeptical.

Some of the biggest student-run organizations representing Minnesota schools say they’re disappointed by the Senate’s plan to set new student loan interest rates according to the cost of federal borrowing — specifically, the 10-year Treasury yield — plus a few percentage points. Under the plan, undergraduates taking out loans in 2013 would pay about 3.86 percent, according to the White House; graduate students would pay 5.4 percent; and those taking out parent PLUS loans would pay 6.4 percent.

The market-based plan is similar to one pitched by both President Obama and House Republicans, though Senate Democrats had been hesitant to embrace the approach. A bipartisan group of senators introduced the new plan — with rate adjustments and caps — last week, and the Senate approved it on Wednesday (both Minnesota senators voted for the bill). House Republicans say they’re willing to go along with the Senate plan.

Comparison of student loan plan interest rates

The proposals from the White House, House and Senate are all tied to the 10-year Treasury yield. For the purpose of comparison, the chart assumes a 10-year Treasury yield of 1.8%, which is the number used by the White House in evaluating the Senate plan. These rates would apply to students taking out loans for the 2013–2014 school year after July 1, 2013. The rate for subsidized Stafford loans for undergraduates prior to July 1 was 3.4%.

The interest rate on subsidized student loans is currently 6.8 percent, having doubled on July 1. For the 2013-14 school year, more than 225,000 Minnesotans will borrow an average of $6,927 in Stafford loans, by the Obama administration’s count, and under the Senate plan, they’ll save $1,548 in interest.

That’s all well and good for students in college now — the rate on the subsidized loan is only going up about .26 percent over last year’s level, and the unsubsidized rate is actually lower. But student groups warn rates could spiral upward just a few years down the road, hurting future borrowers.

Kelly Charpentier-Berg

Under Congressional Budget Office projections, for example, the interest rate used as the basis for student loan rates is expected to increase over the next couple years, forcing student loan interest rates into 7-percent territory as early as 2017. Under current law, the rate would remain 6.8 percent.

“We are opposed to the current deal,” Minnesota State Colleges Student Association president Kelly Charpentier-Berg said. “In the long-term, it’s actually going to cost students more. … With it being market-based, when the economy goes up, the interest rate goes up.”

Student groups skeptical

Matt Forstie and a group of University of Minnesota students were lobbying in D.C. in April when President Obama introduced his budget, which first offered up the market-based plan.

At the time, Forstie and the U’s Minnesota Student Legislative Coalition opposed the idea and were asking lawmakers to freeze rates for two years so Congress could reform the system when it takes up a review of federal higher education policy (a plan to do that received a vote in the Senate, but couldn’t overcome procedural hurdles). In a meeting with Obama administration officials, Forstie said he warned the plan would “set the stage for gridlock” later on.

Matt Forstie

Now, Forstie said he’s not necessarily opposed to a market-based plan, but he said the caps built into the Senate bill — 8.25 percent on undergraduate loans — are too high for students.

“There is a cap in play with the Senate, but the cap is too high,” he said. “I don’t think it’s the right solution for students and I know it’s not the best deal that could have been reached.”

The Minnesota State Universities Student Association had supported an amendment that would have capped the interest rates at 6.8 percent going forward, as well as one from Sen. Al Franken that would steer any federal government income from a higher student loan interest rate to shoring up the Pell Grant program. The first failed on the floor; Franken’s never received a vote.

But the group’s state chair, Alexandra Griffin, said even that wasn’t the best-case solution MSUSA had been hoping for.

“If this is the deal that was worked out, we would like these amendments to pass,” she said. But, “we would like to be at 3.4 percent.”

The Graduate and Professional Student Assembly at the University of Minnesota supported Franken’s amendment as well, but it didn’t take a position on the overall compromise. GAPSA’s president Brittany Edwards said the group had previously supported a plan to tie student loan interest rates to those paid on bank borrowing, which would have dramatically reduced the rate, as well as a short-term rate freeze.

House Republicans back the compromise

Obama administration officials acknowledged Tuesday that the bill could eventually lead to higher rates, but that it’s meant to make sure students are paying a reasonable rate in the short-term while Congress worked on longer-term higher ed policy.

“If you're concerned about the question of whether students are paying a fair rate on student loans, this is a year where students need the relief most urgently,” James Kvaal, the deputy director of the Domestic Policy Council said. “So that's why we feel a sense of urgency about getting something passed this year.”

That seems to be lawmakers’ standard as well. Franken, who voted for the bill and two amendments meant to blunt the higher rates in the long run, said he was sympathetic to students who could be looking at financing college four or five years down the road. But he said the deal would help lower rates for students in the short-term, and that Congress could revisit the issue — and the broader topic of higher education affordability — when it reviews the Higher Education Act next year.

“This is the deal we could get,” he said. “We had to get something that would help students and their families.”

House Republicans said they support the bill and will take it up “expeditiously.”

“I am pleased we finally have a Senate agreement worthy of public support,” Rep. John Kline, the chairman of the House Education Committee, said in a statement. “The legislation approved today reflects the policies and priorities of the House-passed Smarter Solutions for Students Act. This is a victory for students and taxpayers, and I look forward to the bill’s swift passage in the House.”

Devin Henry can be reached at Follow him on Twitter: @dhenry