Washington Watch: Questions remain on student loan interest rates

Washington Bureau writer Jordan Blum
Washington Bureau writer Jordan Blum

The Senate finally has a tentative compromise to retroactively fix the doubling of interest rates on subsidized Stafford student loans that occurred on July 1 for more than 7 million new borrowers this fall.

The interest rates for undergraduate college students who are new borrowers jumped from 3.4 percent to 6.8 percent when Congress was unable to reach a deal last month.

The new bipartisan plan will bring those rates down to 3.86 percent for students this fall, including nearly 85,000 college students in Louisiana.

The catch, though, is that the plan links the subsidized loans to a 10-year Treasury note. Although the rates are fixed and a cap is placed on future interest rates at 8.25 percent, new borrowers five years from now are already being projected to see interest rates at about 7 percent — more than the current doubled rate.

The plan puts the interest rate for graduate student loans at 5.41 percent this fall with a cap of 9.5 percent.

While the plan is arguably improved for students from what was on the table before July 1, Sen. Tom Harkin, D-Iowa, previously called the strategy a “classic bait and switch.” Now, Harkin is reportedly ready to support the revised compromise that is expected to receive Senate approval this week.

Sen. Mary Landrieu, D-La., had been siding with Harkin and other Democrats in supporting a one-year extension of the 3.4 percent interest rates. That effort failed though to get even 50 votes on the Senate floor. It needed 60 votes to overcome a GOP filibuster.

Landrieu opposed the previous proposals under the argument that she didn’t want the federal government profiting off the backs of students.

The new compromise still raises $715 million in federal revenues over 10 years, but that’s a lot less than the projected $3 billion or more raised from the student loan bill passed by the House.

So Landrieu is now ready to support the compromise after the extension effort failed.

“I feel pretty good about the latest compromise,” Landrieu said Thursday after the tentative deal was reached.

“I am very proud that I did not go along with the initial offer that was laid on the table by some Republicans that reflected what the House did,” Landrieu said. “Because some of us held strong on that, we’re going to get the rates lower.”

The House bill also is a market-based plan that keeps interest rates low initially. But that bill allows rates to fluctuate year-to-year for students and it did not include caps.

President Barack Obama is reportedly backing the tentative Senate compromise.

But not all senators are on board, especially some of the more liberal ones.

“Making millions off the backs of our students is obscene,” said Sen. Elizabeth Warren, D-Mass., while arguing that she will still oppose the bill.

Sen. Bernie Sanders, I-Vt., called the compromise a form of “regressive taxation” that overly burdens lower- and middle-income students and their parents. “We have a crisis right now in terms of student indebtedness. Why would we want to make that crisis even worse?” Sanders said.

Indeed, student debt has risen from about $550 billion to $1 trillion in the past five years, according to a recent Joint Economic Committee report. But the doubled Stafford interest rates would add about $4,500 to the cost of earning a bachelor’s degree, the report stated.

Sen. Dick Durbin, D-Ill., who helped broker the compromise, responded to Warren and Sanders, among others, that opposing the deal represents a vote in favor of the current doubled rates. He argued that the deal is the best they can get that Republicans will support.

“We have students who need to make some life decisions pretty quickly,” Durbin said.

Sen. Lamar Alexander, R-Tenn., who also was involved in negotiations and who was once the president of the University of Tennessee, called it a good bill that follows an “unusual” situation in which both the GOP-led House and Obama wanted a market-based approach to the loans.

“It sounds to me the kind of bill the House would want to accept and claim victory on,” Alexander said.

Jordan Blum is chief of The Advocate’s Washington bureau. His email jblum@theadvocate.com.