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October 20, 2017

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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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