Interest Piece: The Student Loan Rate Song and Dance

Tom Harkin and Arne Duncan

By Ray Li.

Only the most special of issues in Washington can cause House Republicans and President Obama to laud each other, Senate Democrats to fight each other, and Congress to work together in the face of overdue deadlines. Only one issue can turn this drama into an annual spectacle.

For the past couple of months, students around the country have been taking to Twitter, Congressional letter campaigns, and Capitol Hill protests to spread the rallying cry of “Don’t Double My Rate.” These students are calling for action on federal student loan interest rates that were set to double on July 1st from 3.4% to 6.8%, and indeed those rates did double, but a last minute Senate compromise might be able to stop the increase before any students are affected. The story seems all too familiar, as the fight over the doubling of student loan interest rates has become an annual battle since 2011. With each new iteration, however, Congress spices things up with new proxy wars and bouts of political framing.

The student loan interest rate saga began in 2007 when Sen. Kennedy (D-MA) and Rep. Miller (R-CA) passed the College Cost Reduction and Access Act, which sought to lower rates for subsidized federal Stafford loans from 6.8% to the 3.4% we know today. The bill had a built in sunset provision that raised these rates back up to 6.8% in 2012, but at the last minute Congress struck a deal to delay the rate increase for a year. Sound familiar?

All of this legislation refers specifically to subsidized federal Stafford loans, which the federal government offers to students of financial need in order to make college more affordable. The backdrop of financial distress across the country heightens the relevance of this debate for all Americans. The issue even galvanized both parties of this “Do Nothing Congress” to formulate plans to fight this rate increase.

Almost everyone, from President Obama to Senate Democrats to House Republicans, agree that students should not have to pay more interest to the federal government on top of already exorbitant college costs. The problem lies in the fact that each of these groups has created its own plan to solve the crisis, while facing not only inter-cameral bickering but also party infighting. This issue provides a unique case where not only are House Republicans bashing Senate Democrats’ inability to find compromise, but Senate Democrats are bashing each other for compromising too much or too little.

The main differences between these plans boil down to whether or not the federal government should set fixed interest rates that would stay the same over the life of the loan or tie them to market rates that would vary depending on the economy. Additionally there is debate as to whether or not to cap these rates.

In late May, the Republican controlled House, led by Speaker Jon Boehner (R-OH), Majority Leader Eric Cantor (R-VA), and Education Committee Chairman John Kline (R-MN), passed a bill that tied Stafford loan interest rates to 10-year Treasury rates plus 2.5%.  The GOP broadly supported this plan due to its market-based approach that keeps these interest rates out of the federal government’s direct control.

Both President Obama and Secretary of Education Arne Duncan supported the plan to implement the market-based 10-year treasury rate, but suggested only a .93% rate add on rather than the 2.5% passed by the House. The White House also preferred if the loans were set at a fixed rate for the life of the loan, rather than vary every year as the House plan proposes. Despite these discrepancies the Obama Administration still praised the House’s ability to reach a compromise before the July 1st deadline.

With the ball squarely in the Senate’s court, Senate Democratic leaders faced immense pressure from their counterparts in the House, the White House, and a looming deadline. Majority Leader Harry Reid (D-NV) quickly found out that his biggest obstacle wouldn’t be members of the minority party but instead members of his own Democratic base. While Majority Leader Reid and Chairman of the Education Committee Tom Harkin (D-IA) took cues from the White House and supported a plan similar to the plan that the House passed in May, influential Democratic Senators broke from the pack.

Senator Jack Reed (D-RI) proposed a plan that would set the interest rates to the 3-month Treasury rate rather than the 10-year Treasury rate that the House bill employs. For loans taken out next year that would translate to a rate around 2.5% rather than 4.6%, a significantly lower rate.

Rising political star Senator Elizabeth Warren (D-MA) took this line of reasoning even further while also creating a new proxy war on Wall Street in her proposal. She suggested that student loan interest rates be the same rates that banks receive when taking emergency loans from the Federal Reserve, which is about .75%. This plan vastly differs from the other proposals, and its extreme and seemingly unrelated nature is costing her votes but is winning her huge political points. Warren recently made a splash as a freshman on the Banking Committee with a proposal for new finance regulations that would effectively restore Glass-Steagall. While selling her student loan proposal, she juxtaposed the differing treatments by the federal government of banks versus students, hoping to create a zero-sum game between the two in the minds of the public. Even though this plan did not garner enough support to be passable as legislation, it won the war of the public opinion realm by resparking anti-banking sentiments in preparation for her fight for financial regulation.

While Senate Majority Whip Dick Durbin (D-IL) struggled to corral his own troops, House Republicans capitalized on the opportunity to cast their political foes in an unflattering light. The Senate has always carried a reputation of the chamber of Congress where bills get debated but nothing gets accomplished. The fact that the Democrats in Senate were the ones causing this particular hold up provided the perfect political ammunition for Republicans like House Majority Leader Cantor, who took to Twitter with daily reminders that “it’s time for Senate Democrats to stop playing games and take action on student loans.”

In a period of divided government, the ability to pass the blame of legislative gridlock to your opposing party and chamber of Congress pays real political dividends. President Obama and Senate leaders recognized this political bleeding, and finally reached a compromise at the end of last week. The final bill closely mirrors the House bill, and passed with an 81-18 majority with 17 Democrats and 1 Republican opposing. The House passed the bill today 392-31 and President Obama intends to sign it into law so that students will now face a 3.86% interest rate instead of 6.8% for this upcoming year.

In the end, Republicans won the battle by adopting a plan that held true to their fundamental proposal of utilizing market rates and limiting government control over student loans. Republicans also picked up political points along the way by being able to cast a negative light on the Democrats, as the Senate couldn’t compromise before the deadline due to intra-party duels.

With regards to students, only time will tell whether or not they benefited as much as they could from this deal. Senate Education Committee Chairman Harkin has gone on record saying “Don’t let anyone tell you this is a bad deal for students,” but although students are facing a lower rate now, the rates could still rise up to 8.25%, which would be significantly more than the status quo. Senate Democrats like Warren and Reed warn that the possibility for high rates in the future is a serious concern.

Through the muddied confusion of all of these plans, percentages, and political factions, one thing rings clear. Playing politics in Washington often means caring as much about the means and gamesmanship as about the actual policy in the end.

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