The stories of indebted college graduates unable to marry and start families, let alone buy houses or start businesses, have become all too common. Second only to mortgages, student loans comprise the largest debt of U.S. households — after aggregate auto loans, credit cards and home-equity debt balances. The numbers are sobering: According to the Consumer Financial Protection Bureau, the average debt for graduating seniors is $26,000, and national student debt has tripled in the past eight years to surpass $1.1 trillion. It gets more grim: On July 1, interest rates on federally subsidized Stafford student loans is set to double from 3.4 percent to 6.8 percent, costing the average student an additional $1,000 per year.
Many lawmakers on both sides of the political spectrum agree that the looming interest rate hike is senseless and avoidable. For any progress to be made, however, House Democrats and Republicans must translate this sentiment into compromise. Congress needs to attack this political football and set a long-term solution before last year’s rate extension expires. A bill introduced by House Education and Workforce Committee Chairman John Kline (R-Minn.) last Thursday could serve as the basis for a plausible solution.
Kline’s legislation, called the Smarter Solutions for Students Act, supports President Obama’s 2014 fiscal request to set student loan rates based on the financial market, but differs in that it sets a cap at 8.5 percent for Stafford loans and 10.5 percent for PLUS loans to calm fears of runaway rates. The bill would apply to all federal student loans (except Perkins loans) and would base student loans on 10-year Treasury notes. The resolution falls in line with Obama’s budget proposal, demonstrating a growing agreement that a market-based approach is more reasonable than allowing Congress to continue setting interest rates. Keeping rates subject to campaign promises is shortsighted because it creates uncertainty for student borrowers in the long haul.
According to the Congressional Budget Office, the Smarter Solutions for Students Act would save the government $990 million over five years and $3.7 billion over 10 years. This proposal ensures that students can take advantage of lower interest rates when available, and furthermore protects against overly-inflated rates by enforcing a ceiling.
Under the current law, most borrowers are saddled with high interest rates that do not reflect low interest rate periods in the economy. Market rates are expected to rise over the next five years, with the 10-year note expected to increase to 4.9 percent in 2017. With the 2.5-percent add-on as set in Kline’s proposal, the rate would theoretically rise above the doubled rate of 6.8 percent and land at 7.4 percent — but the cap would help stabilize federal loan programs. If this proposal became law, college graduates could also opt to take out a consolidation loan, which would allow them to lock in the same interest rate for the life of the loan.
The bill ends temporary reprieves and will provide stability to low- and middle-income students working to finance college. By sweeping the student interest rate problem off the table, Congress can focus more attention on streamlining federal student aid programs.
The fate of this measure, though, depends on whether Democrats’ skepticism can be dispelled so that the bill can enjoy broad bipartisan support in the House. Some Democrats on the House Education Committee are concerned that basing rates on the market would actually increase the cost of education in the coming years. Others are concerned about whether Congress could use the savings from terminating a decreased rate to give low-income students larger grants. Still others have set forth alternative bills.
While House Republicans and Obama are seeking a long-term fix, many Democrats in the Senate are clamoring instead for a short-term extension of the current 3.4-percent rate. As total student loan debt continues to climb, public university tuition has risen 27 percent over the past five years, and meanwhile, median household income has decreased. In California alone, inflation-adjusted tuition more than doubled in public two-year community colleges, and it increased by over 70 percent in four-year public colleges. The issues raised by each senator can be debated when the House Committee on Education and the Workforce considers amendments to Kline’s bill before sending it to the House.
If these trends continue, post-secondary education will become even more unaffordable for a majority of students. The debt problem needs to be mitigated not just now, but in the coming years as well.
Hundreds of thousands of college graduates are further delaying buying big-ticket items such as cars and homes, stifling economic growth. An entire generation should not be stepping out into their professional lives mired in irresolvable debt. Obama promised to prevent student loan rates from skyrocketing in his 2012 reelection campaign. Let’s hope that his words become a reality.
