Washington Buzzing About Student Loans

Congress has less than 60 days to address the interest rate hike on subsidized student loans effective July 1. Opinions vary widely across stakeholders and political parties about the best way to move forward.

The President surprised both parties when he proposed a market-based rate -- without a cap -- paired with income-based repayment (IBR) in his FY 2014 budget released in early April. (See earlier Washington Update story.) Most had expected him to continue supporting the effort by Democratic congressional leaders to enact a two-year extension of the current 3.4 percent interest rate.

Meanwhile, some congressional Republicans think there should be a long-term solution enacted within the next 60 days that reflects a variable market rate, while others support universal IBR without an interest rate cap. Student advocates support keeping the 3.4 percent rate, thereby lowering federal government’s profit on student loans. Other independent voices have suggested the 6.8 percent rate be allowed to go into effect.

Many Questions

There are many moving parts that make student loans work, and they all raise important policy questions. Those that seem to be on the minds of policymakers in this debate include:

• Where should the subsidy go -- toward front-end student access or back-end borrower repayment?
• How should interest rates be set to provide the greatest and most appropriate benefits to students and their families?
• How should graduate students be treated?
• Should the interest rate be set in law, or by the market?
• Should the government be making money on student loans? (See net subsidy table.) If so, how much?
• Should IBR be mandatory or an option for the borrower?
• Does IBR make an interest rate cap unnecessary?
• How much forgiveness should be included, and for whom? Should it be taxed?

The NAICU Board’s Guidance

At its recent spring meeting, the NAICU board gave staff guidance on how to engage in the upcoming debate on reforming the student loan program. The board’s advice focused on ensuring that policies help students and families by providing a fair program for all borrowers, clear and predictable financing options, and clear and predictable repayment obligations.

Board members feel strongly that student aid is not a tool for shaping the workforce, but for gaining access to, and completing, college. Therefore, it’s worth taking on an appropriate level of college debt if it means earning a college degree. They also particularly expressed concern about the growing cost of graduate student loans.

Down to the Wire

In the meantime, the Congressional Budget Office (CBO) is scoring the President’s FY 2014 budget that was released April 10. Such an assessment is done every year in order to set a new baseline for student loan costs. (For more information on assessing the cost of federal credit, click here.)

The timing of the CBO review is important because no student loan proposals will be scored until after the CBO completes its work on the President’s budget -- and that is not expected to happen until mid-to-late May. Since Congress can’t move forward on student loan changes until the CBO assessment and estimates of the costs of various proposals are complete, most of the congressional action will take place in June.

As many a wise Hill staffer has noted, “You can create good policy, but scoring drives the decisions.”

 

For more information, contact:

 

Stephanie Giesecke, Stephanie@naicu.edu (budget and scoring issues)
Maureen Budetti, maureen@naicu.edu (student loan design)