Senate fumbles student loan rate solution

The U.S. Senate failed yesterday to pass two proposals to keep student loan rates from doubling on July 1. The GOP plan tied student loan rates to market rates. The Democratic plan called for freezing rates for two years. Both failed to win the needed votes, and the impending July deadline makes both sides of the aisle uneasy.

If senators can’t reach a compromise, the new 6.8 percent rate would mainly affect new Stafford loans, but would leave previous loan rates intact. That returns rates to pre-economic crash levels, which Democrats lowered to help the economy. For students who max out their student loans every year, the rate shift would mean this year’s loans will cost more than last year’s.

The Atlantic says even a doubled rate won’t inconvenience students that much. Students who max out their federally subsidized loans will only see increased payments that total the price of a few nice dinners a month. Still, with most borrowers coming from families with modest incomes, a doubled interest rate may make them reconsider taking out loans.

Democrats wanted to extend the current rate for two years while they overhaul the student loan process. Senate Republicans hoped to tie interest rates to the Treasury note and lock in those rates for the life of a loan. The GOP proposal sounds much like President Barack Obama’s budget proposal, which also linked interest rates to markets and would raise the rate to 6.1 percent in 5 years. It’s also similar to a version of the bill House Republicans just passed.

The president said he would veto the House plan, which also ties rates to Treasury notes and caps them at 8.5 percent.

The chairman of the House Education and the Workforce Committee, Rep. John Kline, R- Minn., said he does not plan to revisit his legislation and that it’s up to Obama to negotiate a deal or get the blame for higher rates: “It leaves us with one body in Congress—the House—having passed legislation … that would provide the long-term fix to the student loan interest rate problem.”

The “long-term fix” may depend not on federal legislation but on more students becoming realistic about their fields of study and job opportunities. Last August, Federal Reserve Chairman Ben Bernanke urged students to think twice before taking out loans: “You’ve got to make smart investments.” He said students should know what kinds of jobs and salaries they can expect and should research graduation rates. Taking on debt to pay for college can be an effective way to increase earning potential, but Bernanke warned that college can become a financial burden if it doesn’t lead to a job.

The Associated Press contributed to this report.