Student loan interest sparks debate

The average school-related debt is $27,000.
The average school-related debt is $27,000.

President Barack Obama last week pushed his plan to tie federal student loan interest rates to the market, and criticized a Republican plan passed by the House of Representatives that he said would cost borrowers more.

The mounting burden of student loan debt, now pegged at more than $1 trillion, with an average borrower owing $27,000, is seen as a drag on the economy and a barrier to people getting educations needed for better jobs.

Currently students pay the same fixed rate for federal student loans, set by the government at 3.4 percent, regardless of changes in other interest rates in the economy. If Congress does nothing, those rates are scheduled to rise to 6.8 percent on July 1.

“Higher education cannot be a luxury for a privileged few. It is an economic necessity that every family should be able to afford, every young person with dreams and ambitions should be able to access,” Obama, flanked by college students, said at an event in the White House Rose Garden.

In Obama’s plan, rates for subsidized federal student loans would be set every year based on the market plus 0.93 percent, but remain fixed for the life of the loan. His plan, for instance, would lock in rates for next year’s borrowers at 2.9 percent for the life of the loan.

He also would fully fund the Pell Grant program that helps low-income students, expand work-study programs and include an income-based repayment option.

Students who take out private student loans face more stringent repayment terms, making government-backed options a more attractive alternative.

But Obama’s plan eliminates a cap on interest rates, which critics say puts students at risk of paying higher rates on government student loans in the future.

The Republican plan, passed by the House last week, requires rates for subsidized and unsubsidized loans, known as Stafford loans, to be recalculated every year and pegged to 10-year Treasury notes, plus 2.5 percentage points. The plan caps interest rates for the loans at 8.5 percent.

Veto threat

Under that plan, a student who borrows the maximum amount of subsidized and unsubsidized Stafford loans over five years would pay $14,430 in interest, according to the non-partisan Congressional Research Service. If rates double on July 1, a student would pay $12,598, compared with $7,965 at current rates.

“It could actually cost a freshman starting school this fall more over the next four years than if we did nothing at all and let the interest rates double on July 1,” Obama said. “The House bill isn’t smart and it’s unfair.”

The White House last week threatened to veto the House version of the bill. Democrats who control the Senate want to extend the current lower rates for another two years while they work on a more comprehensive long-term rate system.

Republicans including as House Speaker John Boehner of Ohio and House Education and the Workforce Committee Chairman John Kline of Minnesota accused the president of politicizing the student loan issue, rather than ironing out the differences between the two plans.

“With time so short and the differences between our proposals so slight, today’s event was misguided and deeply disappointing,” Boehner said.

The Institute for College Access and Success opposes both plans, saying such market-based options could force borrowers to pay more later or turn to riskier private student loans at time when young people still face a tight job market amid a tough economy.

“Students and families need the assurance that federal student loans will remain affordable,” the institute’s president, Lauren Asher, told Reuters.



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