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GOP Doubles Down with Cynical Student Loan Bill

THE HOUSE HAS PASSED STUDENT LOAN SOLUTIONS, TIME FOR THE SENATE TO ACT

Posted by Nick Marcelli on June 18, 2013

Today, House Republican Leadership held a press conference to discuss the steps the House has taken to avoid the doubling of student loan rates on July 1. The House has already passed a solution to avoid the doubling of student loan rates that echoes the President’s own plan. It is time for the Senate to act.

http://majorityleader.gov/blog/2013/06/the-house-has-acted-to-avoid-doubling-of-student-loan-rates-its-time-for-the-senate-to-act.html

BUT WAIT!

Take a closer look at what the GOP and Eric Cantor are touting as a positive step to help students pay for college.

Stafford Loan – Current fixed rate for this student loan is 3.4% and it is scheduled to double in July to 6.8%.  The House GOP just passed the Smarter Solutions for Students Act (SSSA) which would end the fixed rate and calculate a variable rate at 2.5% points over the 10 year Treasury Bill rates, with a cap of 8.5% on Stafford Loans.  The average 10 yr T bill rate so far this month is 2.66%, so the current Stafford Loan rate would be 5.16%.

While the 5.16% today is better than the 6.8% rate beginning in a few weeks, the variable rate cap of 8.5% is 1.7% higher than the fixed rate would be. So Congratulations to the House GOP for passing a plan that would both lower and raise student loan rates at the same time.  If this isn’t cynical enough for you, add the SSSA’s current student loan rate of 5.16% today with the cap rate of 8.5% and then divide by two. This gives us the variable rates mid-range of 6.83%, nearly identical to the higher fixed rate as of July.  So for bankers this is a revenue neutral proposal over a range of years while current college students get only a 52% rate increase as of July.  For future college students the rate can more than double the current 3.4% fixed rate.

A look at the other provisions of the bill reveal similar findings. This could be a bill written by the student loan industry to squeeze more out of students without appearing to be quite as greedy.

Below is an analysis that (also cynically) does not assess the financial impact if the current 3.4% rate is allowed to stay the same.

H.R. 1911, Smarter Solutions for Students Act

cost estimate

may 20, 2013

read complete document  (pdf, 28 kb)

As ordered reported by the House Committee on Education and the Workforce on May 16, 2013

H.R. 1911 would change the interest rates for all new federal loans to students and parents made on or after July 1, 2013, from a fixed interest rate set in statute to a variable interest rate, adjusted annually. Under the bill, interest rates for all new subsidized and unsubsidized student loans would be based on the interest rate on a 10-year Treasury note plus 2.5 percentage points, with a cap of 8.5 percent. (Borrowers pay no interest on subsidized loans while enrolled in school or during other deferment periods but are responsible for interest at all times on unsubsidized loans.) The interest rate for all new GradPLUS and parent loans would be based on the interest rate on a 10-year Treasury note plus 4.5 percentage points, with a cap of 10.5 percent. The bill also would eliminate the cap on the interest rate on all new consolidation loans (multiple loans for a single borrower combined into one loan) originated on or after July 1, 2013.

Under current law, all subsidized and unsubsidized loans originated on or after July 1, 2013, will have a fixed interest rate of 6.8 percent, and all GradPLUS and parent loans will have a fixed rate of 7.9 percent. In addition, the interest rate on all consolidation loans is capped at 8.25 percent.

CBO estimates that enacting H.R. 1911 would reduce direct spending by about $1.0 billion over the 2013-2018 period and by $3.7 billion over the 2013-2023 period. Enacting the bill would not affect revenues. Pay-as-you-go procedures apply because enacting the legislation would affect direct spending. Implementing the bill would not have a significant impact on spending subject to appropriation.

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