The coming student loan debt crisis has been widely discussed but it remains low on the list of problems facing Congress and the priorities of the American people. In fact, political leaders are trying to dodge a proverbial bullet on the issue. On July 1 the House and Senate voted to raise the interest rate on subsidized student loans from 3.4 to 6.8 percent, a move that economists say will hamper students’ efforts to repay loans in a jobless economic recovery and educators say will hurt low-income students trying to get an education.
Congress returns from its July break this week with egg on its face, and is franticly searching for a way to fix the problem retroactively. Although the recent vote to double interest rates affects only newly issued federally subsidized loans, according to the Congressional Budget Office this represents 25 percent of all such loans
The prevailing idea has been to extend the 3.4 interest rate for another year as a short-term fix while politicians struggle with the implications of contributing to a financial bubble that looms on the horizon. However, that plan is going nowhere in the Senate where 42 Democrats have signed onto legislation extending the rate for one year because it is part of a larger package that includes alleged tax increases. House Republicans are opposed to this temporary fix because it is rolled into a bill that contains “permanent tax increases,” which is nothing but the closure of a loophole for inherited retirement accounts. In short, they would rather appear in favor or raising interest rates on student loans so that the super-rich can continue to exploit a tax loophole, than search for a bipartisan solution.
Another plan that has recently been floated with the bipartisan support of six senators would reform the federal student loan system entirely, and perhaps depoliticize it, by pegging loans to 10-year Treasury notes with an additional 1.85 percent cap. The proposal from Sens. Joe Manchin (D-WV), Tom Carper (D-DE), Angus King (I-ME), Lamar Alexander (R-TN), Richard Burr (R-NC) and Tom Coburn (R-OK) also includes a key provision demanded by President Obama that is missing in the House bill: namely, locking in interest rates for the life of the loan so that sudden rate increases rates would not lead to crippling payments for workers later in life. However, a weakness of the plan is higher rates for graduate student loans, raising the question whether it will act as a disincentive for students and workers seeking graduate degrees to improve their skills.
Yet, the problem goes much deeper than the Congressional vote to double interest rates and the political backlash it has created among educators and young voters. Paul Combe, president of American Student Assistance, claims that Washington is, in part, missing the point. The looming bubble concerns loans that are already in repayment but workers are suffering from a deficit of good paying jobs in a struggling economy. Student loan payments are further undercutting effective demand as workers see larger portions of their income going to repayment instead of consumption.
“If we have somebody who gets into income-based repayment after they leave school, the interest rate isn’t that big of a deal. It’s how they get that monthly payment,” Combe said.