Playing Politics With Loans Doesn't Help Students

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The current debate about the interest rate on subsidized student loans is a case study in dysfunctional politics. In the nation known for its visionary higher education ideas, from land-grant colleges to the GI Bill, we've spent months fixated on this decidedly narrow policy question: should the rate on subsidized Stafford loans be 3.4 percent, 6.8 percent or somewhere in between?

Last year's election-induced "panderfest" answered the question by not really answering it at all: both presidential candidates called for a year-long extension of the low rate, saving borrowers about $9 a month, costing $6 billion and setting the stage for more drama this spring.

But this year's debate has been even more discouraging, as some leaders – President Obama in particular – seem determined to manufacture disagreement where there should be common ground. Both the president (in his 2014 budget) and congressional Republicans (in a series of bills) have expressed support for tying interest rates to the 10-year Treasury bill plus a couple of percentage points.

[See a collection of political cartoons on the budget and deficit.]

Because interest rates overall are low, the market-based approach would prevent those on subsidized Stafford loans from doubling; better yet, it would get congress out of the business of setting interest rates and would more accurately reflect the government's cost of borrowing. The two sides differ on the specifics, to be sure, but that's what the negotiating table is for.

Instead, what should be an easy fix has metastasized into political theater. When the House passed a market-based proposal in May, the president threatened a veto; in the Senate, neither a two-year extension from Democrats nor a market-based proposal from Republicans could pass a cloture vote. It's now June 21st, and our elected leaders are still trading barbs and staging rival press conferences rather than hammering out a compromise that would serve students and taxpayers better.

[See a collection of political cartoons on Congress.]

So, should rates be allowed to double on July 1? Perhaps, if that's what it takes to get lawmakers and the president back to the negotiating table. Student advocates will cry foul and each side will accuse the other of selling out America's future. But the beauty of letting the low rate sunset is that the conversation shifts from whose rates you're going to increase (a political loser) to whose rates you're going to lower. And these roadblocks tend to get resolved quickly once constituents recognize that the change will hit them in the pocketbook.

Then again, all may not be lost. This week, a compromise market-based approach emerged from a bipartisan group including Democrat Sen. Joe Manchin, W.V., Independent Sen. Angus King, Maine, and Republican Sen. Tom Coburn,Okla. The proposal would keep the rate on subsidized loans from doubling and would actually lower those on unsubsidized loans. Regardless of what happens to this specific proposal, this is where conversation should have started two months ago. In a world with pressing higher education problems, the interest rate debate has already consumed far too much time and energy.

Join us for a live debate on student loan rates on Twitter. Tweet using the #studentloans hashtag

Andrew Kelly

About Andrew Kelly Resident Scholar of the Center on Higher Education Reform at the American Enterprise Institute

Tags
Congress
interest rates
student loans

Other Arguments

#1
62 Pts
Making Loans Fair for Students and Taxpayers

No – Making Loans Fair for Students and Taxpayers

Lamar Alexander Republican Senator from Tennessee

#2
62 Pts
Let the Market Decide Student Loan Interest Rates

No – Let the Market Decide Student Loan Interest Rates

John Kline Republican Representative from Minnesota

#3
47 Pts
Congress Must Act to Prevent Student Loan Hikes
#5
-27 Pts
Getting the Government Out of the Student Loan Business

Yes – Getting the Government Out of the Student Loan Business

Jay Schalin Higher Education Writer at the John William Pope Center for Higher Education Policy

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