POLITICS: PennAve

What happens if the Senate fails to act on student loans?

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Beltway Confidential,Congress,Education,Senate,Fiscal Policy,PennAve,Joseph Lawler,Analysis,Student Loans

It’s time to start thinking about what happens if Congress and the president fail to stop rates on federal student loans from doubling on July 1.

It looks increasingly unlikely that the Senate will be able to find a compromise measure to prevent the rate hike before Monday. A bipartisan group of senators trying to find a deal rolled out a bill on Thursday that would tie rates on student loans to the interest rates on Treasury bonds, but it already looks doomed.

Tom Harkin, chairman of the relevant committee, has already indicated to the Associated Press that he would block the effort. Majority Leader Harry Reid warned that no measure was close to passing in the Democratic Senate because Republican plans include deficit reduction, saying “we don’t think there should be deficit reduction on the backs of those men and women who want to go to college.”

The House has passed a bill that would use Treasury yields to set rates on loans, and President Obama favors a similar approach. But with the Senate far from agreeing on legislation just four days before the deadline, it appears that rates on federally subsidized Stafford loans will rise from 3.4 to 6.8 percent as scheduled under current law.

Both parties have played up fears over student loan rates doubling to energize voters. President Obama in particular began an extended “don’t double my rate” publicity campaign over social media to reach students. House Minority Leader Nancy Pelosi said Wednesday that it was “a matter of economic necessity for our families.”

Despite such warnings, the fallout from the expired deadline would likely be modest.

If the Senate fails to fix rates by Monday, the chamber probably would take the issue up again once it returns after the July 4 break. At that point, it could include a measure in any bill to retroactively lower rates on federal loans taken out in the intervening period.

The only borrowers affected by the doubled rates in that scenario would be students taking out new federal subsidized Stafford loans in in the time after rates double on July 1 and whenever a new bill finally made it to the president’s desk. The rate increase would not affect existing loans.

The number of students borrowing at the higher rates during the meantime would likely be low. Federal student loans are generally disbursed at the beginning of a school semester or quarter, meaning August or September and January in most cases, not July.

The small number of students taking out new subsidized Stafford loans in July would suffer only limited consequences, the federal loans based on financial need. Interest on subsidized Stafford loans does not accrue until the borrower is out of school.

For these students, planning for college would be more difficult, as the 6.8 rate would mean higher debt over the course of college. Democrats on the Joint Economic Committee estimated that the average student borrower would face an extra $2,600 in loans, although that number could vary drastically for individual students. The New America Foundation examined the issue when rates on student loans were due to double last year before Congress passed a one-year fix. It found that the higher rates would result in at most a $9 higher minimum monthly payment for student borrowers.

Borrowers of unsubsidized Stafford loans, which are the guaranteed federal loans available to all students regardless of financial need, would not face any changes from current law. They would miss out, however, on the lower rates that would have applied in the event that the House, Senate or White House plans were passed. The same would be true for students taking out federal PLUS loans.

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