WASHINGTON — Congress is expected to resume debate this week on student loan interest rates in an attempt to retroactively fix a rate increase that began July 1 after lawmakers failed to agree on a compromise.

Interest rates doubled from 3.4 percent to 6.8 percent this month for millions of students who plan to take out new subsidized federal Stafford loans. While the rate increase will affect less than one-third of all student borrowers, the change would result in those borrowers paying, on average, an additional $2,600 in interest over the life of the loan, according to a recent congressional report.

Lawmakers on both sides of the political aisle have pledged to tackle the issue as soon as they return from the Fourth of July recess. Senate leaders plan to take up a retroactive extension bill Wednesday, and Maine Sen. Angus King and others hope to win broader support for a bipartisan alternative.

“We have a terrific plan. We just have to get the Democrats to buy into it,” King, an independent who caucuses with the Democrats, said Friday.

But with Senate Democrats divided on a path forward and Republicans likely to oppose the leading Democratic plan to delay major reforms, it is far from clear what the end product will look like or if an agreement can be reached at all.

“The implications are pretty scary and students are hoping Congress can put aside the partisanship and come together on this issue,” said Sophia Zaman, vice president of the U.S. Student Association, a student-led advocacy organization active on Capitol Hill. “So far we have been really, really disappointed.”

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While credit cards are often portrayed as the source of many consumers’ debt problems, student loans are actually the second-largest source of consumer debt in the United States after home mortgages. Americans owe roughly $1 trillion in student loans – a figure that has nearly doubled since the recent recession began in 2007.

More than 70 percent of graduates from Maine’s public and private colleges and universities in 2011 began their post-collegiate lives with student loan debt. The average debt load among Maine graduates that year was just above $26,046, slightly below the national average of $26,600, according to a report from the Project on Student Debt.

Congress currently sets interest rates for both subsidized and unsubsidized Stafford loans as well as PLUS loans used by parents and many graduate or professional students. But there is a push in Washington to remove Congress from the picture, in part to avoid interest rates from getting caught up in political gamesmanship.

There are currently three major proposals on the table in Congress dealing with student loan interest rates. Key differences in those proposals could add up to a healthy chunk of change for borrowers, depending on the types of loans they take out and future interest rates.

Senate Democrats’ plan: Extend the current 3.4 percent interest rate on subsidized Stafford loans for another year while negotiating longer-term reforms to student borrowing and college affordability. The bill would not change interest rates for unsubsidized Stafford loans (undergraduate or graduate) or PLUS loans.

Senate bipartisan plan: Tie student loan interest rates to the 10-year U.S. Treasury borrowing rate plus 1.85 percent for subsidized/unsubsidized Stafford undergraduate loans, 3.4 percent for graduate Stafford loans and 4.4 percent for PLUS loans. Those rates would be locked in for the life of that particular loan, although rates for subsequent loans would likely vary. There would be no maximum interest rates, but the rates for consolidated loans would be 8.25 percent.

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House Republican plan: Tie student loan interest rates to the 10-year U.S. Treasury borrowing rate plus 2.5 percent for all Stafford loans and 4.5 percent for PLUS loans. Unlike the Senate bipartisan plan, loan rates would not be locked in for the life of the loan but would vary with the market. Stafford interest rates would be capped at 8.5 percent, however, and capped at 10.5 percent for PLUS loans.

Supporters of the Democratic plan to roll back subsidized Stafford rates to 3.4 percent insist their proposal would give lawmakers a year to craft a more comprehensive plan to lower student loan debts and control rising college costs.

In fact, some Democrats want to see the federal government stop earning a profit from student loans. A recent report by the nonpartisan Congressional Budget Office projects that, under the current policies, the federal government will take in $184 billion more than it spends on student loans between 2013 and 2023.

“We should not be burdening our students further. This is an economic question,” Sen. Elizabeth Warren, D-Mass., told reporters just before the congressional recess. “Young people are hurt by student loan debt and, in turn, that hurts our economy. It’s hurting housing, it’s hurting economic recovery in general. But this is also a moral question. The United States government should be investing in our students, not charging them profits for getting an education.”

But there are serious questions about whether Democrats can gain enough Republican support to move the bill forward this week. Critics also point out that Congress punted the ball in June 2012 when lawmakers voted to extend the 3.4 percent Stafford interest rate for an additional year. And one year later, Congress is in the exact same spot.

“My question is: What will we know in a year that we don’t know now?” King said. “Let’s solve this problem.”

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Instead, King is part of the bipartisan group pushing to tie student loan interest rates to the 10-year Treasury rate. Not only is the proposal nearly revenue-neutral by charging only enough additional interest to cover program costs; it would also lower interest rates this year for all borrowers, not just the subsidized Stafford borrowers who benefit from the Democratic plan.

“This would be fair to the taxpayers and it would be fair to the students … because we would not be reducing the federal debt on the back of the students,” Sen. Lamar Alexander, R-Tenn., said late last month. The other co-sponsors of the bill are Democratic Sens. Joe Manchin of West Virginia and Tom Carper of Delaware and Republican Sens. Richard Burr of North Carolina and Tom Coburn of Oklahoma.

The authors of the Democratic plan counter, however, that the bipartisan proposal lacks a cap on interest rates.

That’s also a concern for college students, said Zaman with the U.S. Student Association. Although interest rates are currently low, they are bound to rise and the prospect of not capping rates is “very scary” to students, she said. And that’s why her organization is supporting the leading Senate Democratic plan.

“We are hoping at the very least they can pass a one-year extension,” Zaman said.

Kevin Miller can be contacted at 317-6256 or at:

kmiller@mainetoday.com

On Twitter: @KevinMillerDC

 


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