Some experts say the proposal would not help the neediest students
In the run-up to the Congressional elections last fall, one of the top campaign promises made by leaders of the Democratic Party was to halve the interest rate on federal student loans. But now that the Democrats have taken control of Congress, they may find it more difficult than they expected to fulfill their pledge.
The Democrats have an uphill battle, in part, because the plan — despite being popular on the campaign trail and with advocates for students — is generating little enthusiasm among the student-aid experts and college lobbyists whom the lawmakers are trying to get to rally behind it.
“I haven’t heard anyone say they really like the idea,” said a higher-education official, who wished not to be identified for fear of offending Democratic leaders. “Most people would rather see them concentrate on increasing spending on Pell Grants.”
The plan to slash the interest rate was one of three student-aid proposals that Democrats promoted during the campaign. Rep. Nancy Pelosi, of California, the new speaker of the House of Representatives, pledged that if her party gained control of Congress, it would move quickly to make higher education more affordable by lowering the student-loan interest rate to 3.4 percent from 6.8 percent; raising the maximum Pell Grant to $5,100, up from $4,050; and increasing the tax deductibility of college tuition.
While many student-aid experts would rather see the lawmakers focus first on Pell Grants, the primary source of aid for the neediest students, House Democrats have made the loan proposal, which they believe has widespread appeal among middle-class families worried about ever-rising college prices, their top priority.
In fact, they have vowed to pass a bill in the House cutting the rate within the first 100 hours of the new Congress. A vote on the bill could occur as early as next week.
Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and the Workforce and a close ally of Ms. Pelosi, is leading the effort to push the bill through.
“Middle-class Americans are increasingly squeezed between the declining paychecks and the rising bills for basic items such as housing, health care, college tuition, and energy,” Mr. Miller said at a news conference last month.
Reducing the interest rates on student loans, he said, would be a key part of his panel’s “simple but urgent” agenda “to strengthen the middle class in the United States of America.”
Advocates for students are championing the proposal, saying that it will bring much-needed help to middle-income and working-class students who have been forced to bury themselves in debt to pay for college. “If this policy is enacted, millions of students will see their total cost of repayment reduced by thousands of dollars,” says Luke Swarthout, a higher-education associate with the State Public Interest Research Groups. “That’s a substantial savings for
borrowers who desperately need the relief.”
But aid experts and some college lobbyists say the costs of the proposal — estimated to be at least $30-billion to $40-billion over the next 10 years — outweigh its benefits. While the plan would provide some relief to loan borrowers, it would do little, they say, to accomplish the main goal of federal student-aid policy: narrowing the college-going gap between low-income students and their more-affluent counterparts.
“Cutting the interest rates in half might have made for a good sound bite,” Mark Kantrowitz, publisher of FinAid, a Web site about student aid, wrote in a letter last month to Ms. Pelosi. “But a closer look shows it to be very expensive with very little student-aid policy benefit.”
An Appealing Message
Even some of the Democrats’ biggest supporters acknowledge that the decision by party leaders to make the interest-rate proposal a centerpiece of their campaign had more to do with politics than policy.
When devising their strategy for taking back control of Congress, Democratic Congressional leaders were looking for policy proposals that were easy to explain on the stump and that provided a stark contrast to the Republicans’ record.
Early last year, Republican leaders pushed through Congress an unpopular budget-cutting bill that slashed $12-billion from the federal student-loan programs, raised interest rates on government-backed loans available to parents, and made it impossible for borrowers to lock in interest rates lower than 6.8 percent when refinancing their student loans.
The legislation also allowed a scheduled change to take place in the interest rate that borrowers pay on their student loans. As a result, the rate switched from one that varied from year to year depending on market conditions but was capped at 8.25 percent to a fixed rate of 6.8 percent. At the time the bill passed, borrowers were paying a rate of 5.3 percent.
Unhappy with the change, some Democratic lawmakers, advocates for students, and some college lobbyists called on Congress to keep the variable rate but lower the cap to 6.8 percent. Under that scenario, they argued, borrowers would be able to benefit in years when the rate dropped below the maximum level.
As much as some Democrats supported that option, party leaders knew that calling for maintaining a variable rate with a reduced cap would have little saliency on the campaign trail, according to a former Democratic Congressional aide, who wished not to be identified to avoid angering his former colleagues. Making a clear-cut promise to cut the interest rate in half, the officials argued, would be a much more powerful message to send voters.
“It was very much about what was messageable,” the former aide said.
Making Good on a Promise
Democratic lawmakers are now scrambling to make good on Ms. Pelosi’s vow to swiftly pass a bill in the House slashing the student-loan interest rate.
Their biggest challenge has been finding the money to pay for the proposal. The Democrats are primarily looking to finance the plan with savings generated by cutting the subsidies the government pays private lenders to make federal student loans.
But the proposal comes with a hefty price tag. As a result, the lawmakers have had to scale it back.
At first the lawmakers called for slashing the interest rates on almost all federal loans taken out by students or their parents. Now they are focusing on reducing the rates only on federally subsidized student loans, which go to students with the most financial need. The government pays the interest on subsidized loans while students are enrolled in college.
House Democrats briefly considered making the interest-rate cut for only one year. Then they hoped to make the cut permanent as part of legislation to renew the Higher Education Act, the law governing most federal student-aid programs, which they hope to consider later this year.
Advocates for students, however, were unhappy with the idea because they were not convinced that Congress would complete work on the reauthorization legislation anytime soon, and the Democrats have backed away from that proposal.
Now lawmakers say they will phase in the rate reduction over the next five years, reducing it, for example, in 2007 from 6.8 to 6.1 percent.
Rep. Howard. P. (Buck) McKeon of California, the top Republican on the House education committee, has signaled that Republicans will fight the proposal. In a news release last week, Mr. McKeon argued that the Democrats’ plan would not expand college access or increase college affordability. “In fact,” he said, “some are correct to wonder whether their plan simply amounts to phantom reform that would further escalate the college-cost crisis.”
Still, no matter how vigorously Republicans fight the proposal, Democrats, who hold a 16-seat majority in the House, should be able to easily pass the bill in that chamber.
The plan’s prospects, however, are much less assured in the Senate, where the Democrats hold only a slight advantage.
Ironically, it is Sen. Edward M. Kennedy, the Massachusetts Democrat in charge of the education committee in the Senate, who could serve as the main impediment to the proposal’s progress.
Unlike his counterparts in the House, Mr. Kennedy has ruled out offering the plan as a stand-alone bill. Instead, he has said that he intends to introduce a higher-education reauthorization bill as early as next month that would contain a set of proposals meant to make “student loans work for students and not just the banks.” This legislation would include a proposal to cut interest rates.
But because Mr. Kennedy also plans on taking on the loan industry in the bill, it could get mired in partisan battles.
While some of the proposal’s supporters were surprised by the senator’s decision not to expedite the rate cut, Mr. Kennedy wrote in an e-mail message last week that he felt it was important for Congress to “enact a comprehensive plan to make college more accessible and affordable for students.”
Mutually Exclusive?
Student-aid experts and college lobbyists who are critical of the Democrats’ proposal see an opening with Senator Kennedy. They hope to persuade him to devote savings from the loan program to increase Pell Grants rather than to slash interest rates.
Mr. Kennedy made just such a proposal in the fall of 2005 when Republicans were crafting the budget-cutting legislation. The plan used savings from reducing government subsidies to lenders to create a new program that would have provided $6-billion over five years in additional awards to Pell Grant recipients.
The Senate passed the measure. But to Mr. Kennedy’s chagrin, Republican Congressional leaders ultimately decided to use the money to provide larger grants only to those low-income students who graduated from rigorous high-school programs.
The aid experts and lobbyists say the Democrats have a historic opportunity to significantly expand the purchasing power of Pell Grants for low-income students for the first time in over 25 years. Such an infusion of money into the program could make higher education a reality for tens of thousands of college-qualified, low-income students who don’t even bother to apply now because they don’t think they will be able to afford it, some higher-education researchers say.
They fear that the Democrats, in an effort to appeal to middle-class voters, will blow the money on a loan proposal that will do little to increase access to higher education.
“The question is, what are you achieving by cutting the interest rate?” asks Jamie P. Merisotis, president of the Institute for Higher Education Policy, a Washington-based research group. “You are not encouraging any more students to go to college because you’re cutting the interest rate on loans that students have already taken out.”
Sandy Baum, a senior policy analyst at the College Board and an economics professor at Skidmore College, says the interest-rate proposal “costs a ton of money and is not a well-targeted policy.”
Instead of increasing college access or helping borrowers with unmanageable levels of debt, the proposal would be “providing lots of subsidies to people who will be making a lot of money after they graduate.”
But Mr. Swarthout, of the State Public Interest Research Groups, says that Congress not only needs to concern itself with expanding college access but also with the growing debt burden on graduating students. Citing studies that show that rising debt was forcing students to work longer hours, forgo careers in teaching and public service, and delay marriage and childbirth, he said the government “ought to be helping these students.”
“The vast majority of students who will benefit from interest-rate cuts” come from moderate-income families “who need help paying for college,” he said. He noted that 75 percent of traditional-age students who take out federally subsidized loans have parents who make less than $67,000 a year.
In particular, Mr. Swarthout takes exception to the idea that increasing spending on Pell Grants and cutting interest rates are mutually exclusive. “We see cutting interest rates as just one piece in a larger set of policies we support to make college more affordable,” he said.
But with the war in Iraq and a huge budget deficit, will the Democrats be able to find the money to accomplish their twin goals of slashing interest rates and significantly increasing the maximum Pell Grant? Student-aid experts and college lobbyists are doubtful.
Speaking at his news conference last month, Representative Miller said he believed the Democrats would be able to accomplish both. But he sounded a note of caution: “We’ve been left a very substantial sea of red ink by the last 12 years, and we have got to factor that in.”
http://chronicle.com Section: Government & Politics Volume 53, Issue 19, Page A23