Examine Student Loan Proposals as Rates Set to Double

Equal Justice Works

In a deja vu moment, the interest rates on subsidized Federal Direct loans are set to double on July 1 and Congress is scrambling to find a fix.

The Student Loan Ranger thinks there will be one - given the bipartisan recognition that it's an important issue - but the details will matter greatly for student loan borrowers. Here are the ins and outs of some of the proposals.

The president's proposed 2014 budget is a mixed bag for borrowers. It provides a rate that would be fixed for the life of the loan and determined at the beginning of each academic year by adding the 10-year Treasury note rate plus 0.93 percent for Federal Direct subsidized loans, 2.93 percentage points for unsubsidized Federal Direct loans and 3.93 percentage points for PLUS loans.

This would result in affordable rates for borrowers in the near future, but is likely to lead to much higher rates later. The budget request eliminates the cap that has always existed on student loan interest rates - and income-driven repayment plans are not a substitute for a cap - and does not provide a way for borrowers to consolidate their loans at lower rates if market conditions change.

[Find out how to lower your student loan payments.]

The House has already passed the Smarter Solutions for Students Act, H.R. 1911 sponsored by Rep. John Kline, R-Minn. It features a variable rate that is calculated annually by taking the 10-year Treasury note rate and adding an additional 2.5 percent for both subsidized and unsubsidized Federal Direct loans and 4.5 percent for PLUS loans.

Those are high rates, especially for graduate and professional students and parents. The legislation does include interest rate caps of 8.5 percent for Stafford loans and 10.5 percent for PLUS loans, but those compare unfavorably to the current fixed rates of 3.4 percent for subsidized Federal Direct loans, 6.8 percent for unsubsidized Federal Direct loans and 7.9 percent for PLUS loans. In both the short and long term, this bill would probably prove deleterious to student loan borrowers.

[Explore how the Student Loan Fairness Act could benefit borrowers.]

The Senate counterpart to the Smarter Solutions for Students Act is the Comprehensive Student Loan Protection Act, S.B. 682, sponsored by Oklahoma Republican Sen. Thomas Coburn. That bill determines its variable rate by adding 3 percent to the 10-year Treasury note rate to all Federal Direct loans and does not have an interest rate cap. Despite the comparatively low rate it would set for PLUS loans, this is not a good plan for most borrowers and is unlikely to go anywhere in a Democratic Senate.

Also highly unlikely to go anywhere is the Bank on Students Loan Fairness Act, S.B. 897, sponsored by Sen. Elizabeth Warren, D-Mass., which ties subsidized Direct loan rates to the very low rates the federal government provides to banks through the discount window. As it was probably designed to do, it has drawn further attention to the issue of high student loan interest rates.

[Learn more ways to pay for college.]

Student loan geeks should pay attention to the Responsible Student Loan Solutions Act (S.B. 909) sponsored by Sens. Jack Reed, D-R.I. and Dick Durbin, D-Ill. This is more comprehensive legislation that sets Federal Direct loan interest rates annually at the rate of the 91-day Treasury bills, plus a percentage to be determined by the secretary of the Department of Education.

Under this plan, the exact interest rates for each type of loan could - and probably would - vary, but they could not be set to bring in more than the total cost of administering the Federal Direct loan program and borrower benefits and would have to result in the program being revenue neutral for the next year.

In addition, the rates on subsidized and unsubsidized Federal Direct loans would be capped at 6.8 percent and the rates of PLUS and consolidation loans would be capped at 8.25 percent.

Last but not least, previously issued FFEL and Direct Stafford and PLUS loans could be refinanced to take advantage of these new rates.

[Take control of your student loan debt with these tips.]

Something akin to the short-term fix proposed by the Student Loan Affordability Act (S.B. 953) is most likely to pass. Sponsored by Sens. Tom Harkin (D-Iowa), Harry Reid (D-Nev.) and Jack Reed (D-R.I.), it simply extends current student loan interest rates for two years, leaving the rate of Direct subsidized loans at 3.4 percent.

That would give Congress time to work "on a long-term solution to slow the rapid accumulation of student-loan debt." It is probably safe to ignore the provisions paying for the bill by closing tax loopholes - they are unlikely to survive.

If you're confused, the Student Loan Ranger suggests reading this summary over again - it may not make things much clearer, but should strengthen that feeling of "deja vu all over again." And that's the biggest takeaway.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.