APLU Update on the Student-Loan Debate in Washington

May 31, 2013

From our Partners at the Association of Public and Land-Grant Universities (APLU):

As you know, unless Congress acts by July 1, the interest rate on new, subsidized Stafford loans will rise from 3.4 percent to 6.8 percent. Loans already on the books are not affected so this is only about new loans.

Last week there was a flurry of activity on this issue in Washington and I wanted to take this opportunity to update you on where things stand.

Policy Principles of Higher Education Associations
The six Washington higher education presidential associations, including APLU, have made the case to House and Senate leaders as well as the Obama administration that any solution should be guided by two key principles: a) constrain the interest rates as much as practical and b) do not cut back student aid programs to pay for a legislative fix.

The Options
To simplify, the current proposals fall into two broad categories:

Category One would keep interest rates at 3.4 percent or lower for the short-term (one or two years) on new loans.  The leading such proposal would pay for this low rate by closing a variety of tax loopholes that are unrelated to education. A 3.4 percent rate would cost more than $8 billion over two years. Supporters argue that federal resources should be allocated to ensure student loan rates are kept low as a matter of principle.  This is the Senate Democrats’ proposal and it also has strong support from House Democrats.

Category Two proposes a permanent fix with modestly higher rates now and future increases on new loans tied to the 10-year Treasury bond rate plus an additional fixed percentage.  House Republicans and President Obama support this basic approach, but there are some differences between their proposals – the president’s plan would fix rates for the life of the loan versus a variable rate that adjusts annually under the Republican plan; the president’s plan doesn’t have a cap on how high rates can climb while House Republicans cap rates at 8.5 percent; and the president sets rates at 0.9 percent above 10-year Treasury bonds while Republicans set it at 2.5 percent above that level.  The president also makes important proposals that tie the level of federal student loan repayment to a borrower’s annual earnings and forgive the balance of student loans after a number of years under certain conditions

The House and President Obama’s approaches are roughly budget neutral meaning that the programs would pay for and sustain themselves; no funding from other student aid programs or anywhere else in the budget is needed.  

The proposals from the administration and House Republicans were seen by many, including the six higher education associations, to have much in common since they both linked rates to 10-year Treasury bonds and offered a permanent fix. In fact, the Washington Post editorialized to that effect.
Most of the six higher education associations supported provisions of the White House plan and the House bill as a basis for negotiations because each proposal had some attractive features and neither took away money from current programs.  We’ve also been supportive of the Senate bill since the money to pay for it would come from outside of student aid programs.
Where We Stand Now
Last week positions began to harden in Washington as we moved from an environment that seemed open to a bipartisan compromise to a more complicated situation. The administration issued a statement saying that, if the president were presented with the House bill to sign, “his senior advisors would recommend that he veto the bill.” Because the veto threat was unexpected, there is a lot of speculation about the conversations between congressional Democrats and the administration. The Secretary of Education separately expressed concerns about the House bill, including its variable interest rate provisions. The secretary did not talk much about the administration’s proposal, nor did he back away from it either. He said the administration wants to work with both Democrats and Republicans to find a solution.   

The Senate committee with jurisdiction on education issues is working to move forward with the 3.4 percent proposal.  It is possible this proposal could be offered as an amendment to a bill on the Senate floor in an effort to expedite consideration. Senate Republicans are developing their own proposal, which is reportedly more in the spirit of the House and administration proposals.  

Moving Forward
Congressional Democrats will take the view that interest rates must be in the 3.4 percent range as a matter of principle and will frame the debate as an issue of supporting students and opposing tax loopholes. Republicans will say they want budget integrity and that the loopholes in question should be considered as part of comprehensive tax reform rather than as a political tool in the debate over student loans.  The administration is somewhat awkwardly in the middle of all of this having threatened to veto the Republican plan, but still offering its own proposal that is more similar in nature to the House Republicans’ plan than the one offered by congressional Democrats.  

In short, we are unfortunately starting to see a typical Washington standoff.  Since most students wouldn’t feel the impact of a rate increase until they take out loans in August or September, it is quite possible, if not likely, that the political brinksmanship over this matter may go past the July 1 deadline and at least up until Congress’ August recess.

The two things we want to work to avoid are: 1) political stalemate resulting in loan rates doubling to 6.8 percent into the new school year and 2) a last minute deal that would pay for temporary lower interest rates by making permanent cuts to student programs.  Such last minute cuts have happened in the past and were extremely unfortunate.

There is no way that we can stop a political fight, but we can keep on pointing to the July 1/fall semester deadline and argue that lower rates cannot be paid for by taking away current student financial aid programs.  In my time as Deputy Secretary of the U.S. Treasury as well as in the private sector working through interest rate and related issues, I have come to learn that there is rarely a single best answer. Usually, as probably in this case, the solution is through interplay of the structure of the loans and the goals.  

I do think there are a number of possible solutions that can be found by adjusting the different options -- various levels of interest rates, a cap or no cap, variable or fixed rates, etc.  As I look at the proposals on the table, this is not going to be easy but there should be a way to protect the current student aid programs from any structural cuts while also reasonably protecting student borrowers.
We hope that the House, Senate and administration can work through the problem and we will, with your help and that of your government affairs officers, continue to strongly urge them to promptly do so.


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