Student Loan Deal Keeps Low Interest Rate Intact

Ending a months-long stalemate that threatened to drive up costs for students, President Obama and Congress agreed to extend for one year the current low 3.4 percent interest rate on subsidized student loans for college.

Without action by July 1, rates would have doubled to 6.8 percent for an estimated 7 million students, adding about $1,000 to the cost of a typical loan.

“Congress listened to students and their families and delivered a bill that stops student loan interest rates from doubling,” said Rich Williams, higher education advocate for US PIRG.

He said the agreement “is another important step in getting rising student loan debt under control.”

Student groups delivered more than 130,000 letters to Congress earlier this year supporting the low interest rate and continued to lobby on Capitol Hill. “A wave of student and borrower mobilization changed the political calculus,” Williams said.

The White House had made the extension a priority all year. The Republican-controlled House of Representatives had approved a one-year extension but would have paid for its $6 billion cost by cutting funds from the “Obamacare” health care law, prompting a veto threat from the White House.

The final deal would find the $6 billion partly through changes to treatment of employer pension plans.

However, the deal also would make some small changes in student loan policy to save money, said Victor Sanchez, president of the United States Student Association (USSA). The government would limit in-school interest subsidies – which allow students to defer loan payments while in school – for those who take a long time to graduate.

The subsidy would end when students reach 150 percent of the normal time required for graduation, or three years for associate degree students and six years for bachelor’s degree students.

As a result, students who benefit from the new deal in the short term may “pay for the proposal in the long run,” Sanchez said. “Robbing Peter to pay Paul policies are not the solution to our long term problems.”

Still, Sanchez said even with potential long-term concerns, “This is a major victory for students and a small step in the right direction towards an affordable and accessible education for all.”

The measure cleared the House by a vote of 373-52 and the Senate by a wide margin, 74-19.

The latest deal only maintains the 3.4 percent interest rate for another year, after which Congress and the White House will face the exact same situation again. Some advocates and lawmakers say the only way to solve the problem is through a long-term solution.

Rep. John Kline, R-Minn., chairman of the House education committee, has called for a long-term solution that would rely on market rates rather than congressional action. Education advocates also want a long-term solution that helps students lock in lower rates.

Congress began to set interest rates back in 2002, removing market forces from the equation, says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation in Washington, D.C. To take politics out of the discussion, one option now may be for the government to peg rates to U.S. Treasury notes, he said.

As currently structured, he wrote in an analysis of the latest deal, “The program is far from perfect.”