Yet Another Time Bomb

The looming interest rate increase for subsidized student loans replays a familiar storyline: crisis, last-minute fix, another crisis. Meanwhile, the loans' future is in jeopardy.

April 23, 2012

WASHINGTON -- For student aid advocates, the past year has been one crisis after another.

First came a Republican budget proposal that would have slashed the maximum Pell Grant beginning this year. Next were last-second deals that averted a government shutdown and a default on the federal debt. By the time Congress passed a budget in late December, three bills had changed the federal student aid program, each after moments of panic about the future of Pell Grants.

Now the other cornerstone of federal financial aid for needy students, subsidized loans, has joined the Pell Grants in perpetual limbo.

On Friday, President Obama began a full-throated push to stop the interest rate on federally subsidized student loans from doubling in July. But as the president emphasized the issue in a weekly radio address and announced events at colleges in Colorado, North Carolina and Iowa, he set the stage for an all-too-familiar scene: a looming deadline, a fractious Congress, a scramble for ways to offset new spending, and financial aid for millions of students hanging in the balance.

On subsidized loans, students currently pay an interest rate of 3.4 percent, and the government picks up the tab for interest that accumulates while borrowers are enrolled in school — leading to smaller bills when borrowers enter repayment. Unsubsidized loans, which are available to students regardless of financial need, already have an interest rate of 6.8 percent, and the interest accumulates while borrowers are still attending college.

If the rate doubles, it will affect only borrowers taking out new subsidized loans — about 7.4 million students, the administration estimated.

Even if Congress agrees on a last-minute fix to keep the interest rate at 3.4 percent, the crisis for subsidized loans won’t end here. As the struggle to pay for Pell Grants has unfolded, Congress has nibbled at the edges of the subsidized loan program. Now even some Democrats are calling for the program’s outright elimination.

The unpredictability concerns many in higher education.

“We’re looking at a temporary solution, and an expensive temporary solution,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “We are interested in working with everyone to try to find a long-term solution to this issue.”

As total student debt has crossed $1 trillion, surpassing credit card debt, awareness of — and concern about — students’ borrowing is at an all-time high. Obama has seized on the issue, a counterpart to his call for colleges to keep tuition low and “value” high, as the 2012 campaign begins in earnest. His speeches this week are scheduled in battleground states for this fall’s election, leading to accusations from Republicans that the concern about interest rates is politically motivated.

Both parties acknowledge that the latest crisis is hardly a surprise. The College Cost Reduction and Access Act of 2007, enacted when President Bush was in office and the Democrats controlled Congress, gradually lowered interest rates for subsidized student loans for five years, bottoming out at 3.4 percent this year. But once the five-year period was up, the rates were set to double in 2012.

Keeping the interest rate at 3.4 percent for just one year would cost $6 billion, according to Congressional Budget Office estimates. Administration officials promised to reveal more this week about plans to pay for the extension, thought to be for a year or two at the most.

“This is a huge amount of money,” said Jason Delisle, director of the Federal Education Budget Project at the New American Foundation. The interest rate decreases expire this year because Congress couldn’t figure out how to afford them in 2007, said Delisle, a former analyst for the Republican staff of the Senate Budget Committee. “They didn’t want to come up with the offsets then, and if you couldn’t come up with the offsets in 2007 to do this, you’re not going to come up with them now.”

Senate Democrats have said the fix would involve a tax proposal that could get bipartisan approval, higher education lobbyists said. Whether such an accord is possible — given the deep divide on taxes and revenue in Congress — is unclear. In a statement Friday, Representative John Kline, chairman of the House Committee on Education and the Workforce, said he hoped Congress would find “a responsible solution that serves borrowers and taxpayers equally well.”

Paying for the extension through tax revenues would be a departure. Congress sustained the maximum Pell Grant by cutting other higher education programs, including subsidized loans, not by finding new revenue. The fear, for aid advocates, is that similar sacrifices will be made for a temporary fix to the loans.

“Every time we are fighting to keep money, there’s been a cut or an offset,” Draeger said. “There’s a major fear that we would keep the interest rate at 3.4 percent by cutting some sort of real federal access program,” perhaps by tightening eligibility rules again for Pell Grants. And, once gone, those benefits are unlikely to be regained.

A Vanishing Benefit?

One problem advocates for subsidized loans face is that even many supporters acknowledge a difference between the subsidized loans and other, “real” access programs. Unlike cutting Pell Grants, eliminating the interest subsidy wouldn't change how much money students have to pay for college when they enroll. It would just mean a bigger bill at the end. Four years ago, a College Board panel called for ending subsidized loans and using the savings to expand income-based repayment, which, it argued, better targets benefits toward students who are in need after college.

Cutting the interest subsidy would pay for keeping the interest rate on those loans low, but the long-term effect for borrowers would be about the same, Delisle said. Much of the benefit from the lower interest rate would be canceled out by interest that began accruing earlier.

Still, while subsidized loans might not be cut to offset the rate hike, some fear that the subsidized loans are themselves on the way out, in part because even some Democrats now support their elimination. The chairman of the Senate Budget Committee, Kent Conrad, put forward a budget proposal based on a presidential commission’s long-term deficit reduction plan that included ending subsidized loans.

Senate Democrats don’t plan to bring a budget to the floor this year, so Conrad’s proposal itself has not generated too much concern. But the inclusion of subsidized loans is troubling, though the loans are a popular target in long-term deficit reduction plans, said Becky Timmons, assistant vice president for government relations at the American Council on Education.

“Once you create an impression that these are not important benefits, they could go for anything,” Timmons said, adding savings from ending the loan subsidy might not be redirected to Pell Grants or income-based repayment, but instead to other federal departments or to deficit reduction. “It’s troubling to see them as part of a budget discussion. There are really authentic benefits for graduates.”

Congress has been willing to cut loan subsidies before. Subsidized loans for graduate students were eliminated in the deal to increase the debt ceiling, and interest subsidies during the six-month grace period were cut in the federal budget for fiscal year 2012, a move Obama supported. A proposal to end subsidized loans was floated during the debate over the debt limit, but didn't make the final compromise.

“I knew we were on a slippery slope when they eliminated the in-school subsidy at the graduate level,” said Claude Pressnell, president of the Tennessee Independent Colleges and Universities Association and a former member of the federal Advisory Committee on Student Financial Assistance. “It doesn’t surprise me that the conversation continues to come up.”

Because interest rates on unsubsidized federal loans are already relatively high, ending the subsidized loan program would make federal loans “not look much different than all the other loan programs,” Pressnell said. Federal loans still provide benefits, including income-based repayment, that private loans do not.

“Once we lose it, my fear is we’ll never get it back,” he said.

While none of the lobbyists want to see an interest rate hike, they talked about Obama’s campaign with more resignation than fervor. “I’m sorry we’re in this situation where we need another short-term fix,” Timmons said. She said she hoped the Senate would follow through with a two-year extension, which would give legislators time to settle the issue in the reauthorization of the Higher Education Act, scheduled for next year.

“We’ve had a lot of piecemeal, serial changes in federal grant and loan policy over the past four or five years, and that becomes really disruptive,” she said. “You can’t make good policy in a segmented way.”

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Libby A. Nelson

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