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Variable Rate for Loan Consolidation 'Viable,' GAO Says

March 10, 2005

The Education Department's proposal to start charging a variable interest rate instead of a fixed, low rate to borrowers who combine multiple federal student loans into one is a "viable option for reducing federal costs" in student loan programs, the U.S. Government Accountability Office said in a February letter to Republican lawmakers, who had requested the review.

In its budget proposal for the 2006 fiscal year, the Bush administration endorsed a proposal -- originally put forward by House Republicans in legislation to extend the Higher Education Act -- that would pay for an increase in the Pell Grant Program largely through a series of changes in how the two federal student loan programs are managed, including the shift to a variable interest rate in the program for consolidating loans. Advocates for students strenuously oppose such a change, which while saving the government money will ratchet up the costs to borrowers. 

The GAO issued a report in October 2003 that assessed a variety of ways to reduce costs in the loan program, and suggested the loan consolidation change as one possibility. Rep. John A. Boehner (R-Ohio), chairman of the House of Representatives Committee on Education and the Workforce, asked the GAO to reassess the situation  to see "whether economic circumstances -- such as current and projected interest rates -- are such that a variable interest rate remains a viable option for reducing federal costs of student loan consolidation." The answer is still yes, the GAO letter says. 

In a news release from the House education panel, Boehner said: "It's time for Congress to heed the warnings of the GAO, and address the ballooning costs of the consolidation loan program -- a program that doesn't serve students, but higher income college graduates. We must restore the focus of the Higher Education Act to the current and future low and middle-income students it was created to serve."

But the House news release seems to overstate the GAO's conclusions a bit, saying that the accountabilty office "continues to recommend variable interest rates." While the letter continues to suggest that adopting the variable rate is a "viable option" for reducing federal costs, it seems to stop well short of recommending that the government actually take that step.

A spokesman for Rep. George Miller of California, the top Democrat on the House education panel, said the Congressman had not seen the GAO letter and could not comment on it. But he noted a recent Congressional Budget Office study finding that "continuing to allow students the option to consolidate their loans at a low fixed rate will cost $255 million over the next 10 years," far less than the estimate Republicans have offered.

The spokesman added: "Rep. Miller strongly believes that we should do everything possible to make college more affordable for students -- not less affordable -- so he would not support elimination of the current low fixed rate consolidation benefit."

 

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