Congress Called On To Reverse Student Loan Rate Increase

Rates on federally subsidized Stafford loans, which help low and middle-income college students, doubled on July 1. There is now pressure for a deal to undo the increase. NPR's David Greene talks to Matthew Chingos, a fellow at the Brookings Institution's Brown Center on Education Policy.

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DAVID GREENE, HOST:

Congress is back in session on this Monday and students heading to college are hoping that they will fix a recent rise in student loan rates. On July first, the interest rates on federally subsidized Stafford loans doubled from 3.4 percent to 6.8 percent because of the budget sequester. Congress failed to reach a last minute deal to avert that increase before leaving on the July Fourth recess.

And for more on how this is affecting students and what the chances are for this changing when lawmakers deal with it, we've brought in Matthew Chingos. He's a fellow at the Brookings Institution's Brown Center on Education Policy. Matt, thanks for coming in.

MATTHEW CHINGOS: Thanks for having me.

GREENE: So give me a sense of who is really being affected by this, who is feeling the impact?

CHINGOS: So this will affect current college students taking out new federally subsidized Stafford loans after July 1st of this year. So it won't affect people's existing loans. It'll only affect new loans.

GREENE: And is there a dollar amount? I mean, if I'm a student and taking out a loan or, you know, today, tomorrow - before a change goes into place, what I actually feeling?

CHINGOS: So if you wanted to look at the difference between 3.4 percent rate and the 6.8 percent rate, for someone taken of the maximum loan - sort of typical borrowing over a four-year period - you're looking at the difference of about $30 a month. So it's not nothing but it's not as big as this doubling language makes it sound out to be.

GREENE: So we're talking about $30 a month. You graduate from college, you have one of these loans, you're just trying to start out and find a job, I mean that's some extra money that you have to pay out.

CHINGOS: Sure. On one hand, it's some extra money. On the other hand, there's a program in place called Income-Based Repayment that affects new borrowers these days. And it means you don't have to pay more than 15 percent of your income into your student loan payment. So there are protections for borrowers.

GREENE: And if people are interested in those protections, is there anything they have to do ahead of time? Or they can get those protections once they graduate and have to start repaying?

CHINGOS: No, they just have to know about it and they have to, you know, find out how to sign up for it. But there's nothing I have to do right now.

GREENE: So can you remind us what stopped Congress from striking some kind of deal to avert this increase before the July 1st deadline? Both parties seemed to be talking about it like they were heading in that direction.

CHINGOS: Right. More than any other issue in Washington these days, there was pretty wide bipartisan agreement that we should get Congress out of the business of setting loans at any rate - whether it be 3.4 or 6.8 percent. Instead, just pass a law, tie these interest rates to market rates. So, as the market rates moves, so will the student loan interest rates.

And the president wanted to do that. Republicans in the House of Representatives wanted to do that. Republicans and some Democrats in the Senate wanted to do that. But the Democratic leadership in the Senate did not want to do that, so they obstructed any sort of compromise.

GREENE: And what was the argument from the Democratic leadership in the Senate, for not wanting to do this?

CHINGOS: What they said is if you have a market rate-based bill, the rates will rise over time. So five, 10 years from now, you might end up with rates that are higher than 6.8 percent. But I think that's fine because you have to remember 6.8 percent was a great victory for students when it passed because that was a time of much higher market interest rates.

So when you let Congress set the rate and then the market moves around that rate, the market rate and the student loan rate set by Congress get completely out of whack. And then people say the government is making money off of students. Or the government is giving too good of a deal to students. So tying it to the market rate fixes that problem.

GREENE: And many people want to do that but not the Democratic leadership in the Senate, as...

CHINGOS: Exactly.

GREENE: So, Congress powerless to come back this week and potentially deal with this issue. Any chance that Senate Democrats will sort of back off and there might be some kind of an agreement? Or are they going to persuade other lawmakers to fix it to, you know, a market rate as they've argued?

CHINGOS: I mean, it's hard to say. Senate Democrats, what they say they want to do now is kick the can down the road one more year. They want to do exactly what they did last year, which was postponed this. And politically, maybe that's good for them if they think this is an issue they can use to beat up on Republicans. Maybe they want it to come back next year during the 2014 midterm elections.

But I think the difference between last year and this year, is last year, you know, presidential campaign season, no serious policy making gets done. You didn't have all these great market-based ideas on the table. Now you have this opportunity where there's bipartisan agreement. There's a bunch of proposals from the different parties that are pretty close together. So I think it would be a real shame if this opportunity were passed up.

GREENE: Matthew Chingos is a fellow at the Brookings Institution's Brown Center on Education Policy. Matt, thanks for coming in.

CHINGOS: Thanks so much for having me.

(SOUNDBITE OF MUSIC)

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Correction July 8, 2013

The audio of this story, as in a previous Web introduction, incorrectly says federally subsidized Stafford loan rates doubled on July 1 as a result of the federal budget sequester. In fact, the rate increase was not a result of sequestration.

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