With the interest rate on federally subsidized student loans set to double just four months before the presidential election, efforts to avert the hike have reached an impasse, as both parties seek to score political points with voters.
Unless Congress acts soon, the interest rate on subsidized Stafford loans will rise from 3.4 percent to 6.8 percent, on July 1. Democrats and Republicans both want to postpone the increase for a year, to placate student voters, but they disagree on how to cover its cost.
In the Senate, Democrats have proposed paying for the extension by raising taxes on some businesses, a plan backed by the White House. House Republicans want to tap into a fund for preventative health care that was part of President Obama’s health-care overhaul.
Both sides know their plans have no chance of passing in the other chamber, yet they continue to push them to curry favor with key constituencies. By forcing votes on their respective bills, Republicans can highlight their opposition to “Obamacare,” while Democrats can accuse Republicans of protecting “tax loopholes” for the rich.
Lost in the political posturing and campaign rhetoric is the fact that the interest-rate increase would have a modest effect on student debt, costing the average undergraduate borrower just $7 to $9 a month. Only a third of newly issued federal student loans will qualify for the low rate; graduate students will still pay more, as will all borrowers with unsubsidized student loans. And the freeze would last only a year; after that, the rate would revert to 6.8 percent without additional intervention by Congress.
Of course, the current fight over student-loan interest rates isn’t really about reducing student debt—it’s about embarrassing the other side and appealing to core voting blocs: businesses for the Republicans, and students for the Democrats. As Eric Cantor, the House Majority leader and a Republican of Virginia, put it in a recent statement, student loans have become “a pawn in the latest political fight.”
Many student-aid advocates and experts say the $6-billion that it would cost to postpone the interest-rate increase would be better spent on Pell Grants, which face an estimated $7.6-billion shortfall in 2014. They say the grants do more to expand college access for poor students than subsidized loans, which are awarded based partly on a student’s cost of attendance and can go to wealthier students.
“If the goal were to increase the number of low-income students who graduate college, increasing Pell would be a better choice,” said Mark Kantrowitz, publisher of FinAid.org. “But it’s an election year, and this is being dominated more by politics than by policy.”
The interest-rate debate does resonate with young voters, particularly recent graduates facing high debt and a still-sluggish economy. With student debt topping $1-trillion and more than half of recent college graduates under the age of 25 either underemployed or unemployed, “many people are already at the tipping point” for default, said Rich Williams, a higher-education advocate with the U.S. Public Interest Research Group.
Hope for Compromise
The recent fight over student loans began last month, when President Obama used a tour of swing-state colleges to hammer Republicans for failing to pass the Democrats’ interest-rate bill. Senate Majority Leader Mitch McConnell, a Republican of Kentucky, responded that the president was using the rate hike as a sideshow to distract young voters from his failed economic policies. And Speaker of the House John Boehner, a Republican of Ohio, accused Mr. Obama of manufacturing a “fake fight,” telling reporters that Congress could fix the problem without resorting to “campaign style theatrics.”
But the gamesmanship has only gotten worse since then. In late April, House Republicans passed their bill over the objection of Democrats, who slammed the raid on the preventative-health-care fund as an “assault on women’s health.” The White House threatened to veto the bill, calling it a “politically motivated proposal, and not the serious response that the problem facing America’s college students deserves.”
Last week Senate Republicans blocked the Democrats’ bill, arguing that a tax hike would make it harder for companies to hire recent college graduates. Democrats accused Republicans of putting wealthy taxpayers before students and middle-class families, and Republicans accused Democrats of waging class warfare.
Behind the scenes, however, a compromise may be starting to take shape. Both sides say they’re confident that an agreement will be reached by the July 1 deadline, and Senate Democrats have floated the idea of passing an extension without an offset.
For now, though, both parties appear content to use the stalemate to snipe at each other, exploiting the interest-rate issue for political gain.
