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GOP: Student Loan Rate Cut Delivers Less Than Promised January 23, 2007

Posted by notapundit in Congress, Politics, US News.

WASHINGTON (Dow Jones)–Students expecting the newly elected Democratic majority to cut their student loan rates in half better check the fine print, Republicans are warning.

As part of their bid to retake control of Congress, Democrats last summer promised to reduce interest rates on student loans. As the congressional campaigns progressed, that promise was broadened to mean cutting rates in half.

But after Democrats won majority control of Congress in the November elections, that pledge has been pared back.

Earlier this month, House Education and Labor Committee Chairman George Miller, R-Calif., put the promise into legislation and the bill passed 356 to 71 on Wednesday. Senate Democrats are already planning to bring up their own version of the bill, possibly by February.

The main reason Democrats have had to make their campaign pledge more modest is another Democratic promise – to reinstate budget discipline and only do what the federal budget can afford. And because excess profits from student loans are returned to the federal government, cutting student loan rates becomes an expensive proposition.

To immediately cut rates from the federally mandated 6.8% to 3.4% would cost the government $18 billion over five years, according to one estimate, and as much as $60 billion in another.

So instead, Democrats have pared back their plans.

Now, only about half of federally guaranteed student loans would qualify for the rate cut, namely the subsidized loans going to students from middle- to lower-income families.

To further reduce costs, the rate cut doesn’t take immediate effect, but is phased-in gradually over five years. And finally, the 3.4% rate is only in effect for six months, from July 2011 through December 2011, after which the rate reverts back to 6.8%.

Through 2012, the bill would cost the government about $7.1 billion in decreased student loan revenue, according to CBO, an independent agency which acts as Congress’s official budget scorekeeper.

Revenue lost from the lower rates will be made up through cuts to student lender subsidies, but Rep. Miller says the rate cut is worth the cost in any case.

“This legislation will give much needed relief to some 5.5 million students,” Miller argued during the House’s debate of the bill last week. Three-quarters of those qualifying for the break come from families earning less than $68,000 a year, he said.

“And once this interest rate is fully phased in, a student with an average loan debt of $13,800 will save approximately $4,400 over the life of their loan,” Miller said.
Republicans question that math.

“I caution my colleagues not to buy into the talking point,” Rep. Howard McKeon, R-Calif., responded. “It just simply isn’t true.

McKeon and other Republicans argued that if the 3.4% rate were in effect for four years, the math might work, but a student borrowing roughly $14,000 for college over the five-year life of the bill as written would save closer to $2,000.

Miller made no apologies for the calculation, saying that he doesn’t consider the lower interest rate a temporary one, but rather one that will simply have to be reauthorized after 2011. It’s the same logic, he says, that Republicans use to argue that the temporary tax cuts enacted in President George W. Bush’s first term are permanent policy.

In any case, student groups supporting the bill won’t be disappointed, Miller said.

“This was thoroughly discussed with the students when we put this bill together. They understand the problems we have with the (budget) deficit,” Miller said. “That’s what we could do. The students supported it.”

By John Godfrey, Dow Jones Newswires


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