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POLITICS: PennAve

Study: Market interest rates would have helped student borrowers in past years

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Politics,Education,PennAve,Joseph Lawler,Economy

A broad range of student borrowers would have saved significant amounts of money over the past few years if the government had allowed market-based rates for student loans, according to a conservative think tank.

In a paper for the American Action Forum, analyst Chad Miller compared what four students entering college and graduate school in 2009-2010 would have paid if federal student loan rates were set by market forces instead of by Congress. He found that the students' savings would have ranged from $413 to $3,359, depending on their circumstances.

"Had a market-based rate been the law of the land, the average student could have saved up to $3,400 more than they did under the current Federal Direct Lending Program," Miller wrote.

Rates on student loans are set to double on July 1 if Congress does not act. The Republican-led House has passed a bill that would tie student loan rates to Treasury bills, but the White House has threatened to veto it on the basis that it would create uncertainty for students. President Obama's own plan originally called for market-based rates, but the rates would have been set for the life of the loans, instead of resetting each year as the GOP plan calls for. Politico reports that Education Secretary Arne Duncan will meet with Senate Democrats on Thursday to work on a bill that can pass the Senate.

In a previous paper, the American Action Forum found that using market-based interest rates in 2013 would save students up to $1,413 through lowered rates, and save taxpayers roughly $4 billion over the next decade.

Rates on subsidized Stafford loans are currently set at 3.4 percent for undergraduates. Rates were due to double at this time last year as the 2007 law establishing rates expired, but the possible added cost to students of doubled rates quickly became a campaign-trail issue and Congress passed a one-year fix.

The American Action Forum, founded in 2010, is headed by Douglas Holtz-Eakin, an economic adviser for the 2008 McCain presidential campaign and a former director of the Congressional Budget Office. It is the policy arm of the American Action Network, a 501(c)4 headed by former Minnesota senator Norm Coleman.

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