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Will The GOP And The Dems Reach Compromise On Student Loan Rate Issues?
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Will the GOP And the Dems Reach Compromise on Student Loan Rate Issues?

Under the current student rate approval system, interest rates are set by the politicians, and avoiding rate hikes and deadlines means that everyone has to get together "once again" to find a compromise.

So many questions, so many politicians with private agendas, yet few reliable or acceptable answers are to be found without an end to the ever-present bi-partisan bickering. After the Senate failed to pass legislation (prior to the July 1st deadline) that would have prevented a rate increase, the loan rate immediately jumped from 3.4% to 6.8%.

The increase has left millions of students anticipating that the new rate will increase the average loan by an estimated $2,600 - a much higher debt to face when they graduate. Students and their parents can only hope that before fall classes begin that the politicians can reach a compromise that will change the standards for setting federal student loan rates.

The Congressional Budget Office (CBO) calculation methods for determining costs to the government is in dispute with many saying that the methods currently used show a surplus to government when in actuality market risk is not factored into the calculations at all. Other factors not included in the calculations are, 1) there will be some students who will default, and 2) some students with lower paying jobs may choose to tie their payment amount to their income, or could take advantage of other options that may find available, and 3) "proposed" revenue methods used to off-set the costs are unreliable.

The current calculation methods used by the CBO were based on rules established by the Federal Credit Reform Act of 1990. The rules are flawed in that the front-end costs of a student loan is charged in the year it is made, while the revenue it is "proposed" to generate "in the future" is credited to the front-end loan costs in that same year!

So much for unreliable projections that incorrectly show billions in profits! The profits are phantom, and likely will never be realized.

To be clear, both the House and the Senate have so far failed to pass various proposals to fix the current system.

However, last week the Republicans proposed legislation that would tie the rate to the financial markets in a plan similar to one proposed in the budget proposal submitted by President Obama this past spring. The legislation is proposed to tie the loan rate to the 10-year Treasury note yield. If passed, undergraduates would expect to see their plan drop from 6.8% to about 3.66% for every loan made after July 1st. Senate Majority Leader Harry Reid has said he will not back such a plan, and the Democrats are proposing doing a two year rate extension - which means another cliff hanger in two years.

Having a method in place that would give credibility to the true cost to the tax payer is missing and the present method of calculation provides distorted net profits. Students need a fair and reliable method for calculating student loan rates. Clear, concise standards are needed, with key points made without cluttering legislation with wherefores, there-fores, legal jargon, self interest (pork) that only serves to distract and cause dissent.

Street Talk

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