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Set student-loan interest rates with common sense

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From page A12 | July 14, 2013 | Leave Comment

The issue: Keep in mind that these are investments in higher education, and our future

While the Senate missed a July 1 deadline to prevent interest rates on certain student loans from doubling to 6.8 percent, it continues to negotiate a solution. But it shouldn’t compromise by incorporating the House of Representatives’ proposed market-based approach to setting rates.

IF INVESTMENTS in higher education have an intrinsic value, the proposed House bill is short-sighted. If the intent is to subsidize the costs of education for those who can’t afford it, the proper rate of interest should be well below market rates, should be set by Congress and should be a welcome cost to society.

The House-passed bill would peg interest rates at 2.5 percent above a variable rate, determined each year by the yield on 10-year Treasury notes. The Congressional Budget Office estimates those rates would rise to 7.7 percent within the next 10 years.

President Barack Obama also has suggested pegging interest rates to a 10-year Treasury note but having them fixed, not variable, for the term of the loan. He would cap payments at 10 percent of a borrower’s income. The administration has urged Congress to make any proposal retroactive to July 1.

One Senate proposal, backed by Tennessee Republican Lamar Alexander and others, would set interest rates at the Treasury note rate plus 1.85 percent. Perhaps the best of the various Senate proposals, by New York Democrat Kirsten Gillibrand, would set interest rates at 4 percent (and would permit students and graduates with debt at a higher interest rate to refinance at that rate). That would be a real investment in students and would pay dividends when those students graduate and start paying income taxes.

A Senate proposal that failed to pass a procedural vote earlier this week simply would have extended the 3.4 percent rate for the 7 million students with subsidized Stafford loans for another year, while keeping the issue in the headlines for partisan sniping.

WHAT’S LACKING in all of these proposals are the common-sense solutions recommended by credit counselors, consumer advocates and students drowning in $1 trillion of existing student debt.

That would include increased funding for outright grants to talented students; loan forgiveness after a period of years; permitting student loan debt to be discharged in bankruptcy; and limiting or ending lending to students with mediocre high school records who are unlikely to graduate.

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