What’s Your Interest? House Cuts Student Loan Costs

Democrats promised that, during the first 100 hours of the new Congressional session, they would reduce student loan interest rates, making borrowing money for college more affordable to students - starting July 2007.

The House has the votes to pass the bill but the measure faces more resistance in the Senate, where Democrats outnumber Republicans only because Independent Jim Jeffords (Vermont) tends to vote with them.

That means they’ll need every Democratic vote and then some to pass the bill.

What would the bill do?

One of the restrictions on this and all bills that cost tax dollars is the new principle established by the new Democratic majority - each new expenditure must carry with it its own way to pay for itself without increasing the budget deficit. This rule is referred to as "PayGo". This bill is a case study in how pennies add up when we use tax dollars to make good things happen.

The bill would cut the subsidized student loan interest rate of 6.8 percent to 6.12 percent in 2007 and finally to 3.4 percent by 2011.

How does government get banks and other lenders to take the risk of lending money to 18 year olds with the hope that they will pay it back after graduation over a period of 25 years? The government guarantees a fixed return to lenders that provide student loans, so reducing the borrowers’ payments would shift costs to the federal government. The government would make up the loss of revenue by:

• Reducing the amount it pays lenders for loans that go into default by two cents (95 cents instead of 97 cents for every dollar not paid back).
• Ending the "exceptional performers" program, which increased payments to lenders that consistently complied with loan regulations.
• Increasing the fee that lenders pay to the government when they consolidate a student’s loans (up to 1 percent from 0.5 percent)
• Reducing the amount that guarantee agencies recover from default loans (down to 20 percent from 23 percent.)
• Cutting by 0.1 percentage points the return that lenders get on federal loans.

Together, these changes in percentages and cents will cover the $6 billion cost of lowering interest rates.

Those opposed

Some Republicans opposed to the bill say that it will do little to increase the number of students who can afford college. Democratic Congressman Tim Bishop of New York admits that this is just a first step in many that are needed to make higher education available to every qualified high school graduate. In his view it addresses affordability but not access to college for current students.

The ranking Republican on the House Education and Labor Committee, Howard P. McKeon, says that the bill ignores the two most important factors for students - access and affordability. The bill does not help students currently in college that have already signed up for a loan at current rates - some as high as 8%.

Students will not feel the benefits of the bill until after they have completed college and are paying back their loans. But, McKeon argues, the bill does nothing to encourage more students to go in the first place.

What do you think?

What should Congress do to help more students pay for college? How do the students in your family or community pay for school? Where is education on your list of priorities?

Put in your ZIP code below, find your representatives, and let them know what you think!

You can also discuss details with other WomenMatter readers on our blog.

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Posted on: 1/21/2007