College-bound? The Senate's less-than-perfect student loan deal

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It could be worse. That less-than-satisfying phrase best describes a Senate bipartisan compromise on federal student loan interest rates, which could come up for a vote this week. Without the deal, undergraduates from the neediest families will pay twice the interest rate of 3.4 percent that's been in effect for the past two years.

That probably would have been the worst-case scenario, but a House Republican plan also contained perilous provisions.

The issue of student loans is before Congress because a rate reduction plan enacted in 2007 has expired. As of July 1, rates jumped to 6.8 percent, up from 3.4 percent for undergraduates who are eligible for subsidized loans, meaning the government pays the interest while they're in school. Undergraduates whose loans aren't subsidized and low- and moderate-income graduate students already were paying 6.8 percent; if the deal is approved, the rates for these groups would drop.

The goal of the expired grant and loan program signed by former President George W. Bush was to make higher education more affordable. Unfortunately, during the last six years, costs have continued to escalate, along with the amount of money students have been borrowing.

Keeping rates affordable is key so students can obtain the education they need to compete in the workforce.

Wouldn't it be best for student borrowers if the 3.4 percent rate continued to be the law of the land? Sure, but that's politically unrealistic. Republicans in Congress won't go for it, at least in part because it would cost an extra $41 billion over the next 10 years.

The House Republican proposal passed in May contained too much uncertainty. Unlike the Senate measure, the House plan would have introduced variable rates for student loans, so students wouldn't be able to accurately project future repayment costs.

Although interest will change each year under the Senate plan, at least it will be at fixed rates. Undergraduates who borrow this fall would pay an interest rate of 3.86 percent for the life of the loan. Graduate students would pay 5.41 percent. Future rates, adjusted annually, would be tied to the price of Treasury bills, good news for now but more problematic going forward. A safety valve is a rate cap of 8.25 percent, a figure that lawmakers can revisit later.

Another provision would allow lawmakers to tweak rates again based on the results of a study by the Government Accountability Office.

The Senate plan is not perfect. But it's not as bad as the alternatives.



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