Congress to reform federal loans to adjust with economy
Published: Sunday, September 1, 2013
Updated: Sunday, September 1, 2013 14:09
Students taking out federal student loans can expect to see lower interest rates this year, ultimately saving college-aged borrowers an average of $1,500 on interest charges. The reform is a result of the Bipartisan Student Loan Certainty Act, a bill signed by President Barack Obama earlier this month.
The bill, which will link interest rates to the financial market, is part of a number of measures President Obama has pushed over the summer in order to contain rising college costs for students. The newly passed legislation serves as a Congressional response to the doubling of student loan rates on July 1, and was accepted in Congress by an 81-18 vote, with one abstention, according to the U.S. Senate website.
U.S. Senators Chris Coons (D-Delaware) and Tom Carper (D-Delaware), voted in favor of the bill.
In a statement to the press, Carper, who sponsored the legislation, said he believes the bill protects students from the financial difficulties that have come to be synonymous with higher education.
“The law that President Obama signed today will lower borrowing costs for all students right away, while preventing rates from rising to unaffordable levels in the future,” Carper said. “It’s my hope that students in Delaware and across the country will benefit from it for years to come as they pursue a higher education.”
The reform aims not only to decrease the interest rate on student loans currently being given out, but also for the future. It ties interest rates into 10-year Treasury borrowing rate notes, with an additional 2.05 percent in order to cover failed loan expenses. This functions as a link between the success of the American economy and the interest rate of student loans awarded at a given time.
Nathan Franklin, services manager of Student Financial Services, said although this bill lowers rates immediately, it may have adverse effects in the future. He said interest rates and the economy would have a direct relationship with one another. However, students could run into trouble, as the interest rate at the time of the loan is given sets the rate for the lifetime of the loan, Franklin said.
“It would be entirely possible to receive a loan while interest rates are higher only later to become impacted by a slower economy with no reduction to the interest rate being charged,” Franklin said.
While he believes the process might be fairer than arbitrary interest rates, he said it does not consider inflations and downturns in the economy over time. In this way, it awards students who take out loans while the economy is down, whereas students who take out a loan while the economy is doing well receive a higher interest rate.
Although the bill passed by a large margin and was supported by those in the White House, there was some opposition from the Democrats in the Senate. Several proposed amendments were rejected for the bill, including one from prominent senate members Elizabeth Warren (D-MA) and Jack Reed (D-RI).
According to a press release on Sen. Warren’s website, the Reed-Warren Amendment would have lowered the maximum cap on student loan interest rates even further, putting it at 6.8 percent for all loans, as opposed to the 8.25 percent for students, 9.5 percent for graduate students and 10.5 percent for parents’ rate caps that were eventually accepted.
Also proposed as an amendment to the bill was a ‘sunset clause’, introduced by U.S. Sen. Bernie Sanders (D-VT). The clause included a provision that would end the bill’s link to the Treasury note in two years, when interest rates are expected to increase. It would have effectively given Congress two years to find a suitable, long term solution to the problem of rising student loan rates while keeping the rates relatively low.
“The idea of passing legislation that in a few years is going to make an already bad situation of student indebtedness even worse is absolutely absurd,” Sanders said on the Senate floor prior to the vote.
Jamie Serlin, deputy press secretary for Sen. Chris Coons, said while the opposition to the bill was fair, Coons thought something needed to be done immediately to relieve the increasing burden on students and their families after the rate increase. Serlin said there are 18,000 students from the state of Delaware who currently have student loans.
“Sen. Coons felt like this bill was a step in the right direction towards making college more affordable and helping students in the short-term,” Serlin said. “Sen. Coons supported the Reed-Warren amendment, but he felt that something needed to be done.”
Coons intends to continue working toward lowering other costs for college students, Serlin said. In conjunction with Sen. Marco Rubio (R-Fl), Coons is working to pass the American Dreams Accounts Act, which will help prepare students for college earlier by introducing them to financial literacy college during high school. Additionally, Serlin said the legislation would establish a savings account for federal aid that would go directly to college students.