May 28, 2013

Our View: Student loan rates must remain workable

A bill that would turn fixed-rate federal loans into adjustable-rate loans should be defeated.

Every May, college graduates throw their mortarboards in the air. Every June, Congress gets into a game of partisan chicken over student loan interest rates.

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A House proposal would reset student lending rates each year based on the interest rate of a 10-year Treasury note plus 2.5 percent. This measure would put an unreasonable burden on new college graduates.

This year, the fight will be over an absolutely terrible bill passed by House Republicans, which would turn federally subsidized Stafford loans from fixed to adjustable-rate loans.

It would reset student lending rates each year based on the interest rate of a 10-year Treasury note plus 2.5 percent.

If it were the law, interest rates would rise from 3.4 percent this year to 5 percent in 2014, and keep going up until reaching a 8.5 percent cap. By shifting considerable risk onto student borrowers, the government would achieve an estimated $3.7 billion in deficit reduction over 10 years, which would be the most wasteful frugality imaginable.

Student loan debt has surpassed credit card debt, auto loans and home equity loans as the second biggest source of household debt after mortgages. Fortunately, it's not likely to become law. A much better proposal has been introduced by Sen. Elizabeth Warren, D-Mass. Her bill would fix student loan rates at .75 percent, the same rate that banks pay the Federal Reserve for short-term loans.

"If we can invest in big banks by giving them low interest rates on government loans," Warren said in a statement, "we certainly can do the same to help students get an education."

Warren is right, and the Senate should get behind her proposal. A college education is no luxury; it's a nearly essential ticket into the middle class. But saddling young people with too much debt at the start of their working life won't help anyone.

The average student debt load for a 25-year-old has nearly doubled in the past decade, from $10,600 in 2003 to $19,300 last year. That crowds out other borrowing, making harder for young people to buy cars or new homes.

The House Republican plan would put even more pressure on graduates because they would never know from year to year what their loan payments would be. That is no way for the government to save money. Warren's plan is much better, and the Senate should support it.


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