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July 23, 2014

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Politics:

Student loan doomsday has arrived, but can Congress fix it?

For anyone borrowing money for college this fall, today was supposed to be doomsday.

Politicians have been warning for months that without a deal in Congress, the rate on education loans would double July 1, meaning the price of every dollar of tuition borrowed would cost more and perhaps take longer to pay back after graduation.

Doomsday is here. The rates have doubled, from 3.4 to 6.8 percent.

But the turn of events may not take such a toll on students after all.

There’s a quirk to the system when Congress tackles fiscal issues such as loan rates or tax reform. Without congressional authorization, low student borrowing rates can expire just like sales tax deductions can expire, on the first of the year in which they apply.

But as long as Congress gets its act together before borrowers have to start paying up, lawmakers can also reach back in time and vote to retroactively keep loan rates low.

That is exactly what Senate and House lawmakers are planning doing once they come back from vacation in July: using the month to tackle an agreeable solution to keep student loan rates low and voting on it before any borrower enters the next year of school — much less goes into repayment.

The only question is whether they actually will be able to reach a compromise on the solution.

Student loan rate reform has run into a multifaceted roadblock in Congress, with the solution lost in the shuffle of several rate reduction proposals.

House Republicans proposed a capped variable-rate model. Senate Republicans proposed a similar fixed-rate version, without the caps. The White House also proposed an uncapped fixed-rate loan schedule, with lower rates for the loans that serve the neediest students and a percentage cap on repayments later. And Senate Democrats have insisted that the only viable solution is simply extending the current rates for at least a year, preferably two.

After weeks of wrangling, a group of bipartisan senators did finally release a proposal late last week that closely resembled the White House plan. Under the senators’ proposal, repayment rates would be about a percentage point higher. The White House, Republican and now bipartisan repayment plans would tie the student loan rate to the 10-year Treasury bond rate at the start of the loan.

With interest rates so low these days, that might seem like a good deal. But the bulk of Senate Democrats caution that tying to the bond rate doesn’t guarantee low — especially as the Fed moves away from the recession-era policies that kept base rates so low for so long.

Not surprisingly, as Congress neared the July 1 deadline and efforts stalled and failed to get votes, there was plenty of blame flying around.

“Sadly, Senate Democrats continue to block reform and insist on kicking the can down the road with a tax hike attached while attacking the president’s reform plan,” Senate Republican leader Mitch McConnell said Thursday.

"There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families instead of closing tax loopholes for the wealthiest Americans and big corporations,” Senate Majority Leader Harry Reid said Thursday. “Democrats continue to work in good faith to reach a compromise, but Republicans refuse to give on this critical point."

If lawmakers are able to strike a compromise in the months ahead, odds are students borrowing for the coming academic year will eventually pay a lower rate.

The only question is whether students for whom borrowing costs may be prohibitive will be willing to take that on faith.

If lawmakers fail to come up with a compromise before the loans come due, it could cost borrowers an average of $1,000 a year down the line to pay it back, for the life of the loan. And that’s a big gamble for college kids.

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  1. What's to fix. We WANT interest rates to go up to what the market rate SHOULD BE, something above 6%. Sooner or later, students, adults, everybody needs to pay their freight, the cost of carrying them INSTEAD OF depending upon others/taxpayers to carry them.

  2. Wouldn't it be great if everyone in American society realized, and was prepared to contribute to, the education and/or training of all American Citizens? A stronger America would emerge from the education of her citizenry.

    Then we would realize an increase in an educated and informed electorate, and decrease the blatantly self-interested and woefully unenlightened comments we see on sites like these that bring shame to our great country's efforts to assist all Americans in pursuit of the American dream.

  3. Students today have even greater problems related to their education, and the root of such is the same as that which allowed creation of so many of our problems, long ignored flagrant conflicts of interest.
    Nothing benefits a nation as much as good government and nothing damages good government as much as ignored flagrant conflicts of interest. There's a lesson here for a nation that appears to be textbook example of bad government created by allowed flagrant conflicts of interest.

  4. Again, the problem is not really the interest rates but the cost of higher education that is the problem here. Interest makes a difference but if college costs continue to run at two to three times the rate of inflation, even zero interest loans will be inadequate soon. All of my student loans were 7% and higher but the cost of college has increased 4-5X since then while wages have not doubled. Part of that is that we are pushing a lot of people into college who may not be ready or really want to go. Of the students who first started college in 2006 only 54.1% of them had graduated after six years. In many instances, students end up with a couple of years of college with a bunch of debt and are no longer attending. So, they have little job benefit from college and potentially significant debt. Still, nobody seems to talk much about addressing the underlying cost issues and that is where the real problem lies.

  5. Why is the government in the student loan business to begin with?

  6. Right on, Noindex! Why do the millions who never go to college have to foot part of the bill for tomorrow's 1%ers? It's nuts! Most of what we learn is on the job anyway, so, unless it's highly technical, it's a waste of time & money. Let the money and time be wasted by the mope who is really after a "party" school with lots of frats, babes and booze. Serious folks get a job and earn their own way.

  7. Well, let's see...if it were possible to earn a middle-class living for your family without a college education, like it was in the 40s and 50s, then everyone wouldn't need a college education. But now, since labor unions are being broken, and anyone without a college education is religated to menial, low-wage service industry jobs (manufacturing has disappeared due to globalization, outsourcing and the low cost of labor in developing nations). Even the trades need some college these days (computer training, etc.)

    The point is not, "What does it cost for future generations to earn a college education?", but rather, "What will be the cost to America if the next generations do NOT earn a college education?"

    As a society, we must decide if education is important, and if it is, then we must decide to find a way provide it for America's future generations.

  8. The conservatives think a sixth-grade education is sufficient, unless of course you are a member of the ruling class.