Last updated: August 24. 2013 1:29PM - 120 Views

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Congress and the president are jousting once again over the cost of college loans, a perennial dilemma that faces a July 1 deadline to avoid a doubling of federally subsidized interest rates that would discourage thousands of potential students from seeking a college diploma.

Everyone seems to be in agreement that something has to be done to keep college loans low and affordable. Given that student debt amounts to more than $1 trillion, which some fear could trigger an eventual economic crisis, the focus should be on keeping costs down and making them predictable. But that will require the sort of political compromise that is increasingly rare in Washington these days.

The bill passed by the Republican-dominated House in May headed off the two-fold increase over the current 3.4-percent rate for more than 7.4 million students with federal Stafford loans. The scheduled July 1 rate hike would affect only those undergraduates with subsidized loans, where the federal government absorbs some of the interest rate.

This sector comprises about a third of undergraduate loans, which are awarded based on economic need. Under existing law, the remainder — held by middle-class undergraduate and graduate students — would see no increase in interest rates, which have remained at 6.8 percent since 2007.

The House plan changes that. It sets initial interest rates for all students at around 5 percent or just under that when all costs are figured in. That represents an increase for those with subsidized loans, but a break for those without a subsidy and demonstrated economic need.

It also has a number of strong features, including an overall cap on rates. For undergraduates, the rate is 8.5 percent, while loans for graduate students and their parents would have a 10.5-percent cap.

But the Republican plan is seriously flawed. Although it sets low rates for new borrowers — slightly over 2 percent at current 10-year T-bill rates, plus a 2.5-percent mark-up for Stafford loans — the cost of the loan would reset each year based on market fluctuations.

GOP lawmakers like the plan because it would cut the deficit by $3.7 billion over 10 years, but the downside is obvious: A student who borrows money next year can expect to see interest rise every year after that. It makes the cost of a degree considerably more expensive, maybe prohibitively so.

President Obama’s plan also links the rates to the 10-year T-bill, and it allows borrowers to lock in a permanent rate so that they know what a loan will cost as long as they remain in school. Thus, the rates, for now, would be more affordable and predictable. He would cap borrowing costs at 10 percent of a student’s income.

However, the president’s plan does not set a cap on student loan rates in the future, a serious flaw.

Meanwhile, Senate Democrats have their own plan, which boils down to extending the current subsidized rate for at least two years. It would increase the cost to the federal government by $8.3 billion, which Democrats say would be paid for by closing loopholes.

The best solution is a compromise that would retain the best features of the various proposals — affordable, capped and predictable rates and costs — without using college loans as a way to cut the federal deficit.

The government decided to subsidize loans a long time ago because a college education was seen as the gateway to the middle class. That’s still the case. Partisan disputes should not stand in the way of this worthwhile goal.

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