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Possible Breakthrough on Loan Consolidation

July 8, 2005

Compromise is possible in Washington -- perhaps.

Republican leaders of the House of Representatives Education and the Workforce Committee unveiled a plan on Thursday that would allow borrowers to consolidate and refinance their student loans at either a fixed or variable interest rate. But because the panel's proposal skimped on some key details -- like how the two differing rates would be set -- lobbyists for colleges, students and lenders were not sure how far it would go in resolving one bone of contention in Congress's efforts to renew the Higher Education Act.

John Dean, president of the Consumer Bankers Association, offered a typical comment: "If a workable compromise has indeed been worked out, it is welcomed by the lending community, because it eliminates one of the longstanding issues in reauthorization to date. But until we know the details, it would be premature to comment." 

For more than a year, advocates for students and many providers of student loans have been at odds over the education committee's proposal to alter the Higher Education Act by abandoning the current 30-year fixed rate on consolidated loans in favor of a variable one.

The chairman of the House panel, Rep. John A. Boehner (R-Ohio), has argued that letting borrowers consolidate multiple loans into one at the low fixed rate (which until July 1 was 2.8 percent for current students, and 3.5 percent for graduates) has cost the government -- which subsidizes the difference -- too much as interest rates have risen. H.R. 609, the legislation Boehner introduced to renew the Higher Education Act, would let the consolidation rate fluctuate each year with the overall economy, though with a cap of 8.25 percent. 

Student groups and many college officials have argued that letting the market set the rates would almost inevitably hurt students. But that argument has been undercut to an extent by the Congressionally mandated July 1 rise in the fixed rate to 5.5 percent, which has raised the prospect that over time, the fixed rate could actually be more expensive to borrowers than a variable rate.

That change in the dynamic cleared the way for the compromise announced Thursday. The proposal leans heavily on legislation introduced by another Republican member of the committee, Rep. Thomas E. Petri of Wisconsin, who often sides with students over lenders in the debates over the federal loan programs. 

While Democrats on the education committee and advocates for students favor giving students a choice of refinancing options, as the Petri legislation would do, they say that by pegging the fixed student loan rate to the interest rate for a long-term Treasury Department note, the Petri measure, H.R. 1617, would significantly increase what students now pay to consolidate their loans. Democrats and some student aid advocates have also recommended lowering the cap on the variable rate to 6.8 percent, from 8.5 percent.

The increased payments from students are likely to be attractive to Republican lawmakers, who are under pressure to find significant savings from the loan programs in the budget reconciliation process that is unfolding at the same time as the review of the Higher Education Act.

A spokeswoman for the education committee said the panel had not yet worked out details about how the fixed and variable interest rates would be set, and would not do so until H.R. 609 is considered by the Subcommittee on 21st Century Competitiveness next Wednesday.

 

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