After almost a month of debate and disagreement, the Senate approved a plan last week to tie interest rates on student loans to the economic market with a “reasonable cap.”
Subsidized Stafford loans doubled at the beginning of the month from 3.4 percent to 6.8 percent. Both Republicans and Democrats vowed to stop the hike but had difficulty finding common ground.
Rhode Island Senator Jack Reed has been at the forefront of the debate, with his Keep Student Loans Affordable Act, which would freeze interest rates at 3.4 percent for another year while working toward a more long-term solution. Reed’s plan didn’t pass, despite support from many fellow Democrats, including Rhode Island Senator Sheldon Whitehouse.
“Student loans aren’t supposed to be about big profits for the government,” said Whitehouse on Twitter before the vote. A recent post on Whitehouse’s Facebook page added, “we can’t do that [double the rate] to the thousands of Rhode Islanders who have these loans.”
Reed’s plan then merged with the Republican plan to link interest rates to financial markets. The newest agreement offers lower student interest rates through 2015, then sets the rates according to the market, with a cap at 8.25 percent for undergraduate students, and 9.5 percent for graduate students.
Reed said that while he realized his original plan was “procedurally unfeasible” with the current Senate, he was still hoping that even with the current agreement, the cap could be lowered to 6.8 percent for undergraduates and 7.9 percent for graduate students.
This amendment, as well as others like it proposed by other Senate Democrats, failed in the vote on Wednesday. Nevertheless, Reed and his fellow Senators vowed to revisit the issue next year when the Higher Education Act is due for re-authorization.
“The first few years, it would be around 4 percent either way,” Reed said. “But we really want to prevent it [the interest rate] from going up to 8 to 10 percent in the later years. Think of it this way: If you’re a senior in high school today, you would get some relief, but your younger sibling will pay for it later.”
Interest rates on student loans have long been a topic of debate, with each Congress changing policy from a fixed to a variable rate.
Stafford subsidized loans with a 3.4 percent interest rate were set to expire last summer, but Congress passed a one-year extension which ended this July.
If interest rates had stayed at 6.8 percent for this year, students would face an average increase of $45 per month on loan interest rates, based on a $27,000 average in student debt from calculations in 2012.
Throughout the life of the loan, interest rates would more than double, from $4,888 to $10,286, according to Charlie Kelley, executive director of the Rhode Island Student Loan Authority.
Kelley agreed that 6.8 percent is too high an interest rate for students, and said he is in favor of a variable rate (based on markets) with a “reasonable cap.”
“In terms of interest rates, I think anything that will decrease interest rates for students is good,” he said.
The real problem, though, is over borrowing, said Kelley.
“Even if the interest rate is zero, over borrowing is still an issue,” he said. “Schools and organizations like ours need to do more to work with students to understand the obligation they’re undertaking when they take out a loan.”
Kelley added that the amount a student is willing to borrow in loans should be based in part on the field he or she is planning to pursue, and the corresponding salary of that field.
A vote on the current agreement is scheduled for today or tomorrow in the Senate. If the resolution does not pass, the interest rate will remain at 6.8 percent.
Reed said that even if he does not agree entirely with the current compromise, it is better than this alternative, at least until a long-term solution can be passed.
“Ultimately, we need to work on a more comprehensive solution, including lowering the cost of college and addressing the debt,” he said.