Instead of emphasizing the students, I think what theyve done is just try to shield the government from investing in those students. The clear impact of the legislation that is being proposed is that it will increase the cost of education for students, said Reed (watch the full floor statement here). We need to ensure our students have an opportunity to earn a degree without mortgaging their future.
On July 1, the interest rate on federally subsidized Stafford loans doubled from 3.4 percent to 6.8 percent, affecting more than 7 million students nationally and more than 47,000 Rhode Islanders.
The current student loan proposal as written would lock in an estimated $184 billion in student loan revenue for the federal government and allow rates to rise as high as 8.25% for undergraduates, 9.5% for graduate students, and 10.5% for parents.
Senator Reed, who helped write the 2012 law that prevented interest rate increases on new loans to millions of college students and kept rates at 3.4% over the past year, said he plans to offer an amendment to the bill to cap all Stafford loans at 6.8% and 7.9% for the parent PLUS loan.
The Manchin-Burr legislation will shift more and more costs to students, Reed noted. Instead of preventing the doubling of these rates to 6.8%, it would gradually raise these rates above 6.8%. We might see one or two or three years of rates that are relatively below that number, but inevitably, mathematically those rates will go beyond 6.8%. And the caps are rather high. What well see is that a generation of students, particularly the high school students of today -- will be paying a lot more for their student loans and their families will be paying a lot more and it will add to the debt of these students and their families, and it will restrict their ability to become the kind of not only qualified workers in our economy, but also the people that drive the economy.
Reed continued: And there is no real guess as to what level it would go up to because now were moving away from a fixed rate and moving to an adjustable-rate loan. And the rates have been pegged to the ten-year Treasury bill, a rate that we know is going up. Its gone up nearly 1% since just May. And in this environment, it is likely to continue to go up. And the rates that students will pay could rise much more quickly than the projections even that than CBO is suggesting. It could rise because of Federal Reserve policy. If they decide to unwind quantitative easing and in such a way that rates shoot up, then those rates could spike very dramatically.
Now, students and advocates have raised their voices loud and clear urging us not to take this kind of action. Theyve said no deal is better than a bad deal. So the people we are trying to help are actually saying, no, that is not the kind of help we need. So I, with deep regret, believe that this is not the right approach going forward.
Paying for college is tough and this legislation I think unfortunately could make it tougher because it would put in a permanent structure for setting student loan interest rates that could quickly result in students and parents paying more for student loans. This is not a temporary fix to get us to a better place in terms of incentives for tuition, in terms of refinancing, in terms of letting students more actively and more affordably pursue college education.
Reed noted that he is open to the concept of tying student loans to market rates, but the government should not charge excessively high mark up fees. Instead, the rate offered by the government should be based on actual costs. Back in May, Reed introduced the Responsible Student Loan Solutions Act of 2013. This legislation would offer adjustable rate loans for college students with a cap on the maximum interest rate that could be charged to protect borrowers during periods of high interest rates. Rates would be set every year based on the 91-day Treasury bill, plus a percentage determined by the U.S. Secretary of Education to cover program administration and borrower benefits. Under the plan, interest rates for need-based, subsidized federal loans would be capped at a maximum of 6.8 percent. Rates for unsubsidized and parent loans will be capped at a maximum of 8.25 percent. The bill will also allow borrowers who are stuck with high fixed-rate federal student loans to refinance those loans into the new variable rate loan with a cap.
The current proposal on the floor, known as the Manchin-Burr bill, locks in historically high surcharges for graduate students and parents on top of basing the loans on a higher cost instrument.
We're going from the current law, which is 6.8%, to as high as in some cases for parent loans 10.5%. That is a huge swing not in favor of students, but to their disadvantage. That is why Im working on an amendment which I hope to offer that would put the cap at 6.8% for all Stafford loans and 7.9% for the parent plus loan. Again, if we're looking at a fixed rate of 6.8% and we cant do better than that two, three, four, five years from now, we have to ask ourselves, do we really need to make these changes? Or should we make these changes? asked Reed.
Now, if we adopt an amendment as I propose, at least we are telling parents they wont be worse off than current law and theyll be better off because of interest rates at the moment and in the next several years. And I hope we could do that. We are looking at federal student loan debt that is over $1 trillion. This can only mathematically increase that debt. We should be investing in our students, giving them the benefit of relatively low-cost loans so they can go to school and get on with their lives and get our economy moving forward again. And this goes to one of the core issues that we face as a country. Indeed, it is a core issue across the globe -- the growing inequality of income and, in a sense, opportunity in our country and in countries across the globe. Now, here in the United States, the great engine for opportunity has always been education, and if we make it more expensive, then fewer people can take advantage of it. And if fewer people can take advantage of it, the inequality will grow because they wont have the chance for the good-paying jobs, concluded Reed.