Unless Washington lawmakers intervene, subsidized Stafford student loan rates will double next month to 6.8 percent. Although President Obama and the presumptive Republican presidential nominee, Mitt Romney, have both said that Congress must act, Democrats and Republicans so far have been unable to agree on how to offset the $5.9 billion cost of extending the current 3.4 percent rate for one year.
How did this happen? In 2007, Congress passed and President George W. Bush signed into law a bill that reduced the interest rate on subsidized Stafford loans, but only until July 1 of this year. With one out of every two graduates either unemployed or underemployed, however, a rising number of student borrowers are behind in their payments — with serious implications for the broader economy.
On April 27, the House approved, 215 to 195, a Republican proposal for a one-year extension of the current rate, paid for by eliminating a preventive health care fund contained in the 2010 health care overhaul. On May 24, before departing for its Memorial Day recess, the Senate rejected the House proposal, 34 to 32. The Senate also voted on a Democratic bill that would pay for the interest rate extension by eliminating ending a tax break on S corporations ― companies that pass their income, losses, deductions, and credits through to shareholders for Federal tax purposes. That measure lost by a vote of 51 to 43, since 60 votes were required for passage.
In a May 32 letter to President Obama, Speaker of the House John Boehner (OH-R) wrote: “There is no reason why we cannot quickly and in a bipartisan manner enact fiscally responsible legislation.” Attached to the letter were two options for offsetting the cost of the student loan interest rate reduction.
The first option suggested raising the amount Federal employees contribute toward their retirement. Democrats generally oppose this approach because it would reduce the take-home pay of Federal workers, who have already had their benefits cut and wages frozen for several years. The second option would cut off the student loan subsidy — and allow interest to start accruing — for students who attend college part time or take longer to finish. It would also adjust Medicaid payments to the States.
Although Democrats have cost-saving measures in the past similar to those options, it has been in the context of an overall deficit-reduction plan. The White House agreed to evaluate the proposals but made no commitment to use them as a path toward a compromise.
In any case, if Congress does reach an agreement that preserves the current interest rate, it most likely will only be for one year ― meaning that the debate will be repeated in 2013. Meanwhile, many in Congress believe that such a temporary fix simply bypasses the real problem, which is the cost of college itself.