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Congressional Dilemma: Cut Loan Interest Rates

Congressional Dilemma: Cut Loan Interest Rates
Or Increase Grant Aid?

The first Democrat-controlled Congress since 1994 is already struggling with a nagging issue: Whether to focus on cutting student loan interest rates as promised or increasing need-based grant assistance for low-income students.

As Diverse went to press, the House of Representatives was poised to pass a bill cutting student loan interest rates in half, to 3.4 percent over a fiveyear period. But some Senate Democrats want to address interest rates only as part of a larger debate on higher education, and some higher education advocates are sympathetic to that view.

An interest rate cut “is not unimportant,” says Thomas G. Mortenson, an independent higher education analyst and publisher of the newsletter Postsecondary Education OPPORTUNITY.

But cutting interest rates “doesn’t get the money up front, where students need it.”

It’s an argument that may pit lowincome students against their middleincome counterparts. While rate cuts help those already enrolled in higher education, needbased aid could help convince more lowincome students to consider college in the first place.

After making the interest rate cut a major part of their early agenda for the 110th Congress, House Democrats have acknowledged that the goal is a costly one. Their current plan would cut interest rates to 3.4 percent — but only gradually over a five-year period.

Cutting the interest rate by half immediately would cost about $30 billion over five years instead of $6 billion with a phased-in plan through 2011.

But there is still considerable political will to cut interest rates, which is
important if Congress is to chart a new course on higher education policy, says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.

“[Lawmakers] are trying to make college a little more affordable,” he says. “This is in general a good thing.”

While Nassirian also favors a higher Pell Grant for needy students, he says Congress can take an important first step on financial aid by acting on interest rates. “Let us not make the perfect the enemy of the good. We should be happy that we have elected representatives who want to help the loan burdens of students.” Advocates for students have a similar view.

“Lowering interest rates on loans is a great first step towards a more affordable college education,” says Luke Swarthout, a higher education advocate for U.S. PIRG, a public issue advocacy group.

With a phased-in approach, a typical four-year college student starting school in 2007 would save about $2,280 over the life of a subsidized Stafford Loan. A student starting college in 2011 would save about $4,420 as a result of the interest rate change.

But Swarthout says his group will continue to push for increases in needbased financial aid, which is a common theme among many higher education advocates. House leaders also are pledging to increase the maximum Pell Grant, but have offered no timetable on that issue.

To recapture Pell’s purchasing power from a generation ago, Congress would have to increase the maximum grant to $10,000, Mortenson says. Although he recognizes that such a move is unlikely given the current fiscal climate and costs of the war in Iraq, he says it’s time to start moving in that direction.

“We need to get something in place,” he says.

About 5.5 million students a year take advantage of subsidized Stafford Loans, the target of the Democrats’ interest-rate initiative, according to U.S. PIRG. The profile of these borrowers leans heavily toward low- and middleincome students.

House Democrats believe emphasizing the interest rates could be politically advantageous. Last year, the Republicanled Congress slashed $12 billion from student loan programs in a legislative package that also raised rates on many parent loans from 5.3 percent to 6.8 percent.

But while the House is giving priority to the interest rate cut, Senate Democrats may be more inclined to look first at Pell and other need-based aid. Senate Majority Leader Harry Reid, D-Nev., has introduced a bill that would address both loan interest rates and the Pell Grant.

Reid’s bill drew support from many top Senate Democrats, including U.S. Sens. Edward Kennedy, Mass., and Hillary Rodham Clinton, N.Y.

“In the last six years,” Reid says, “the  cost of college has increased 52 percent while federal assistance in the form of Pell Grants has declined.”

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