NCPA - National Center for Policy Analysis

Playing Politics with Loans Doesn't Help Students

June 28, 2013

The current debate about the interest rate on subsidized student loans is a case study in dysfunctional politics. In the nation known for its visionary higher education ideas we've spent months fixated on this decidedly narrow policy question: should the rate on subsidized Stafford loans be 3.4 percent, 6.8 percent or somewhere in between, says Andrew Kelly, the founding director and resident scholar of the Center on Higher Education Reform at the American Enterprise Institute.

Some leaders seem determined to manufacture disagreement where there should be common ground.

  • Both the president (in his 2014 budget) and congressional Republicans (in a series of bills) have expressed support for tying interest rates to the 10-year Treasury bill plus a couple of percentage points.
  • Because interest rates overall are low, the market-based approach would prevent those on subsidized Stafford loans from doubling; better yet, it would get Congress out of the business of setting interest rates and would more accurately reflect the government's cost of borrowing.
  • The two sides differ on the specifics, to be sure, but that's what the negotiating table is for.

Instead, what should be an easy fix has metastasized into political theater.

  • When the House passed a market-based proposal in May, the president threatened a veto; in the Senate, neither a two-year extension from Democrats nor a market-based proposal from Republicans could pass a cloture vote.
  • It's now the end of June, and our elected leaders are still trading barbs and staging rival press conferences rather than hammering out a compromise.

So, should rates be allowed to double on July 1? Perhaps. The beauty of letting the low rate sunset is that the conversation shifts from whose rates you're going to increase (a political loser) to whose rates you're going to lower. And these roadblocks tend to get resolved quickly once constituents recognize that the change will hit them in the pocketbook.

Recently, a compromise market-based approach emerged from a bipartisan group including Democrat Sen. Joe Manchin (W.Va.), Independent Sen. Angus King (Me.), and Republican Sen. Tom Coburn (Okla.). The proposal would keep the rate on subsidized loans from doubling and would actually lower those on unsubsidized loans. Regardless of what happens to this specific proposal, this is where conversation should have started two months ago. In a world with pressing higher education problems, the interest rate debate has already consumed far too much time and energy.

Source: Andrew P. Kelly, "Playing Politics with Loans Doesn't Help Students," U.S. News & World Report, June 21, 2013.


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