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Student Loan Interest Rates Still Tangled Up In Congress

Politics / Student Finances Jul 18, 2013 - 01:05 PM GMT

By: Money_Morning

Politics

Tara Clarke writes: Student debt in the United States has already surpassed the country's auto loans and consumer credit card debt. A student loan bubble looms on America's horizon, and promises dark times should it ever burst.

And earlier this month, the student loan problem worsened.

Federally subsidized Stafford loan interest rates doubled from 3.4% to 6.8% after Congress missed the July 1st 2013 deadline, and instead recessed for the Independence Day holiday.


The failure sparked frustration amongst student advocates nationwide.

However, Congress is able to retroactively "fix" the damage done by the soaring rate increase - that is, if Democrats and Republicans can come to an agreement on the matter.

So far, no dice: an emerging bipartisan Senate deal hit a stumbling block last week.

Even though the House was able to pass its own plan in May, the Senate is still at an impasse.

Democratic senators are avoiding the prospect of trying to "balance the budget on the backs of students."

On the other hand, Republican senators want a plan that doesn't risk adding huge sums to the deficit.

Here's what we've got so far:

The tentative deal ties Stafford loan interest rates with rates on the 10-year U.S. Treasury note.

Additionally, there would be a capped interest rate of 8.25% for undergraduates and 9.25% for all other loans.

Republicans would get a link between the financial markets and borrowing terms through this proposal.

Democrats would get a guarantee that interest rates would not reach 10%, their proverbial line in the sand.

The crux of the matter is that Senate Republicans want rates tied to the market, so student loans aren't subsidized by taxpayer. Meanwhile, Senate Democrats are pushing for interest rates that benefit students, not government coffers.

Thus, the bipartisan agreement hinges on a plan which is revenue-neutral.

Unfortunately, the deal snagged when the nonpartisan Congressional Budget Office (CBO) concluded it would cost the government $22 billion over the next 10 years.

That number gave justifiable pause to both parties -

The CBO numbers reflect how expensive a cap on student loan interest rates can be to taxpayers.

And so it's back to the drawing board for the Senate.

The pressure for Congress to reach a deal boils as our warm summer days tick away. Come August, students will begin taking out their loans.

If a deal isn't struck by then, millions of students will start the school year with borrowing terms two times higher than when school let out.

Congress' Joint Economic Committee determined the increase would cost the average student roughly $2,600 extra.

White House spokesman Jay Carney said of the negotiations, "There is no question that there is a compromise available on this important issue and that the sides have not been that far apart and we just need to get it done."

Lawmakers involved in the negotiations include Sens. Lamar Alexander, R-Tenn., Richard Burr, R-N.C., Tom Coburn, R-Okla., Tom Harkin, D-Iowa, Angus King, I-Maine, Joe Manchin, D-W.Va., Jack Reed, D-R.I., and Majority Whip Dick Durbin, D-Ill.

White House and Education Department officials have held lengthy meetings with Senate leaders over the past several days.

Last Thursday, Sen. Alexander stated that he has been keeping other senate Republicans in the mix and they seem of like mind:

"They seem generally comfortable. I don't have their commitments to vote for it yet, but we know we won't get everything we want, and as long as the Democrats understand that too, we'll probably have a pretty good result."

It seems to me that Congress' feel-good faith in itself has students biting their nails down to the quick.

And are student loan interest rates really the main issue the country should be focusing on?

Certainly the issue of the doubling rates needs to be immediately addressed, but it's just one aspect of a much larger problem.

I think Jim Kessler, senior vice president for policy at the centrist think tank Third Way, hit the nail on the head in his commentary:

"We're chasing higher, constantly increasing tuition costs. That's the big education finance problem in America right now. The cost of college tuition has increased faster than inflation for 33 years...There's a point where we have to ask ourselves, 'Are we subsidizing tuition increases or are we really making college more affordable for people?'"

Further increases in student debt loans spell disaster for the US economy; find out why the Student Loan Bubble is the Next Subprime here...

Source :http://moneymorning.com/2013/07/17/bernanke-testimony-sends-mixed-signals-on-qe3/

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