WASHINGTON -- If Congress doesn’t act, the interest rate on federally subsidized Stafford student loans will double in just over 10 weeks, on July 1. At a hearing Wednesday, lawmakers from both parties and Education Secretary Arne Duncan appeared optimistic about achieving something rare here these days: a compromise on a long-term solution before time runs out.
Duncan made his case for President Obama’s budget request  for the 2014 fiscal year Wednesday morning before the Senate Appropriations Committee’s Subcommittee on Labor, Health and Human Services, Education and Related Agencies. And while the budget request covers early childhood through postgraduate education, senators spent much of the hearing discussing higher education issues.
For some, the student loan interest rate issue was a case of déjà vu. In 2012, the interest rate on subsidized student loans, which have lower interest rates and don’t accumulate interest while students are enrolled in college, was scheduled to double from 3.4 percent to 6.8 percent July 1. A coalition of advocacy groups and both presidential campaigns persuaded Congress to pass a one-year extension.
That extension cost $6 billion, and, as Duncan acknowledged, was something of an election-year fluke: “If we didn’t have a presidential election, I don’t know if we would have gotten it done last year,” he said. The extension pushed the issue to this July 1.
In its budget request, the Obama administration has proposed returning to market-based interest rates for student loans for the first time since 2006. Rates would be set at varying levels based on how much it costs the government to borrow money, as measured by the yield on 10-year Treasury bonds. Subsidized loans would have an interest rate of the 10-year treasury yield plus 0.93 percentage points; unsubsidized loans, 10-year Treasuries plus 2.93 percentage points; and PLUS loans for parents and graduate students, 10-year Treasuries plus 3.93 percentage points.
The administration says its proposal is budget-neutral, and critics and supporters alike say it’s a better deal for students in the short term, since interest rates are currently at historic lows. (If the proposal were in effect today, the interest rate for a new subsidized Stafford loan would be at an all-time low: 2.7 percent. Unsubsidized and PLUS loans would also have lower rates than they do today.) But students are worse off, and taxpayers benefit, in the long term, because interest rates are expected to rise as the economy improves. Beginning in 2017, according to an Education Department analysis, rates under the administration's plan would be slightly higher than they would be under current law, assuming subsidized loans revert to 6.8 percent.
Republicans in particular say they like Obama's idea. At a hearing Tuesday on broader higher education issues, Representative Virginia Foxx, a North Carolina Republican who usually has few kind words for the Obama administration, praised his proposal. Three Republican senators -- Lamar Alexander of Tennessee, Tom Coburn of Oklahoma and Richard Burr of North Carolina -- have also introduced a bill to return to market-based rates.
That bill, the Comprehensive Student Loan Protection Act (S. 682), would charge all federal student loan borrowers an interest rate of the 10-year Treasury yield plus 3 percent. Unlike the administration's plan, it would eliminate the practice of charging different interest rates for different types of loans. But Alexander, who quizzed Duncan on the costs of student loans, said he was hopeful that Senate Republicans and the Obama administration could work out those details. (Note: This paragraph has been updated to correct an error. The bill would preserve the in-school interest subsidy.)
“It seems to be an area where we agree,” Alexander said, later adding: “We can talk about the difference there. I recommend that we go to work on that pretty quickly and avoid this year-to-year trauma.”
Democrats, though, were generally more skeptical, echoing concerns from student groups that the lack of a cap on the interest rates could harm borrowers or suggesting that Congress take more time to work out a long-term fix.
Senator Jack Reed, a Rhode Island Democrat, praised the long-term solution but pressed Duncan on whether it was possible to accomplish in the 75 days that remain before the interest rate doubles.
Senator Jon Tester, a Montana Democrat, asked whether administration officials have considered an interest rate cap. In response, Duncan said only that they want to avoid fixing the rate every year.
Squabbles Over State Spending
Representatives of the administration, including Obama himself, have made their position on tuition prices at public colleges and universities clear: states need to stop cutting spending on higher education and passing costs along to students. At Wednesday’s hearing, Republican senators tacitly agreed with the premise -- that state cuts are driving tuition prices up -- but blamed Medicaid rather than state legislators.
If the administration would sit down with governors or legislators, “you would find out very, very quickly why these things are happening,” said Senator Mike Johanns, a Nebraska Republican, who went on to blame growth in the Medicaid program for taking money from state higher education budgets. Alexander, who made a similar point at a hearing yesterday, echoed him later on.
Duncan and Senator Tom Harkin, the Iowa Democrat and the subcommittee’s chairman, pushed back. Duncan said he realized that states have “competing priorities,” but suggested they should reconsider where higher education falls among them. “Forty states cut funding for higher education, but 40 don’t cut funding to prisons,” Duncan said.
Harkin blamed the growth in Medicaid spending on the recession, and said higher education cuts are more deeply rooted. “This has been going on for 20-something years,” Harkin said. “State legislators have figured it out: we don’t have to fund that.”
Since college costs and affordability will be in the forefront when the Senate begins the long process of rewriting the Higher Education Act, that debate is likely to continue.