EDITORIAL: Student loan interest rates should promote opportunity

June 7, 2013 

President Barack Obama, congressional Democrats and congressional Republicans have fallen into the usual tug of war over the nation's student loan program.

The resulting legislative logjam comes with significant consequences for students.

If the parties cannot reach a compromise, on July 1 the current 3.4% interest rate on need-based loans for middle to lower income students will double to 6.8%, affecting about 7 million students.

This battle is not new. The college student loan program has been the object of contention since the 1950s. Today, the debate centers on whether the loans should have fixed or variable interest rates.

House Republicans have passed a bill (H.R. 1911) with variable rates and a cap of 8.5%. Here's the problem: While market interest rates are at historic lows, economists predict they will rise over time as the economy improves. The way Republicans have set the variable rates, students would do worse under H.R. 1911 than under the doubled 6.8% rate.

The Congressional Research Service has laid this out in a chart. Assume a student borrows the maximum $19,000 for college, starting in 2013-14. Under the current 3.4% rate, that student would pay $3,450 in interest; under the 6.8% rate, $7,284. But under the H.R. 1911 variable rate, the student would pay $8,331 in interest.

Senate Democrats also support a variable rate, but different from the House Republican version. They want a two-year extension of the 3.4% rate; after that rates would be variable, tied to the interest on a 10-year Treasury note plus a percentage to cover program costs. Interest would be capped at 6.8%.

For his part, President Obama set out a middle position. He would lock in the 3.4% rate for another year, then have interest rates vary from year to year for new loans -- but fix the rate for the life of the loan, like a traditional home mortgage. His plan wouldn't have a cap.

People expect to borrow to pay for a car or house. Borrowing for a college education should be affordable enough to be a sound investment -- if we are to ensure upward mobility in our "opportunity society."

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