WASHINGTON, D.C. — As a member of the House Education and the Workforce Committee, Congressman John Tierney, D-Salem, stands amid the tussle on Capitol Hill regarding a doubling of the interest rate on federally subsidized Stafford loans that could impact the finances of 7.4 million low-income students.
With congressional inaction, the rate for these loans for students headed to college this fall shot up from 3.4 percent to 6.8 percent Monday.
Tierney said he is not only concerned about the short-term impact of the rate hike — Congress could reverse it in the coming weeks — but a long-term plan to make student loans as affordable as possible. There are plans on both sides of the aisle to revamp the federal student loan system, but Tierney and Democrats say Republican plans would raise student loan rates more than Democrats’ plans, and more than the 6.8 percent rate.
If Congress acts quickly and passes a stop-gap measure to keep the subsidized Stafford loans at 3.4 percent, students would not have to pay double the interest rate, Tierney said.
The future of federal student loans — how they are structured, whether they are variable or fixed, at what interest rate they are capped, and whether they are tied to certain interest rates — is a complicated issue.
U.S. Sen. Elizabeth Warren, D-Mass., for instance, had a plan that drew headlines because it would lower the rate to 0.75 percent for one year. It’s the same discount rate at which the government lends money to banks.
While Warren’s plan has been criticized, Tierney said: “If it’s good enough for the Wall Street banks, it’s good enough for the students.”
According to Tierney, rates for subsidized Stafford student loans were gradually lowered to 3.4 percent from 2007 to 2011. These rates expired, but Congress extended the low rates temporarily.
Part of the problem, Tierney said, are budget rules in the House that say revenue reductions need to be made up.
“Ostensibly, if you don’t let it go to 6.8 percent, you are going to reduce revenue,” Tierney said.
However, besides that “budget gimmickry,” Tierney said the federal government is not a business and should not be profiting off student loans. He cited a figure of $51 billion that the federal government reaped off student loans last year.
Democrats would like to resolve the issue of student loan rates once and for all, Tierney said. In May, according to a Tierney press release, Sen. Jack Reed, D-R.I., Sen. Dick Durbin, D-Ill., Tierney and others announced the Responsible Student Loan Solution Act of 2013.
Under this bill, student rates would factor in defaults and administration costs and would be pegged to the rate of the 91-day Treasury bill, which is presently below 1 percent. The Republicans’ plan would tie new student loans to the 10-year Treasury bill, which carries a higher rate.
As rates rise over time, Democrats would cap rates at a maximum of 6.8 percent for subsidized Stafford loans and 8.25 percent for unsubsidized Stafford loans, according to the congressmen. It would also allow those with high-interest fixed-rate student loans — about 37 million people — to refinance them under this plan.
In the short term, Tierney said there are proposals to roll back the subsidized Stafford rate to 3.4 percent. Democrats on the committee are trying a parliamentary procedure to move a bill by writing a letter to committee Chairman John Kline, R-Minn., said Tierney, one of the letter’s co-signers. Kline has three days to act or Democrats can force a hearing with the support of three committee Republicans.
“I think it’s really frustrating that Congress can’t come to an agreement on the basic things that everyone agrees with,” Tierney said.
“In this age of volatile politics, it is amazing that government has come to this,” said retiring North Shore Community College President Wayne Burton.
North Shore Community College students don’t borrow that much, but a significant number do have subsidized Stafford loans. In a twist, the doubling of the student loan rates may actually be beneficial to community colleges, as students flock to less expensive schools when education becomes more expensive to finance.
Staff writer Ethan Forman can be reached at 978-338-2673, by email at email@example.com or on Twitter at @DanverSalemNews.