Senate Gets an “Incomplete” on Student Loans
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By Josh Boak,
The Fiscal Times
June 28, 2013

The Senate will depart for a July 4th holiday with college students kept in limbo about the status of their federally subsidized loans.

Nobody in the upper chamber feels thrilled that interest rates on new Stafford loans will double on Monday to 6.8 percent, a problem that they will then have to fix retroactively when the Senate reconvenes.

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“I’ve watched us kick the can down the street to where my toe is hurting,” groused Sen. Joe Manchin (D-WV) in a Thursday floor speech. Manchin has co-sponsored a bipartisan measure to peg the undergrad loan rates to the 10-year Treasury note yield plus 1.85 percent, while setting graduate loans at slightly higher rates.

But Sen. Jack Reed (D-RI) and 37 other Democrats want to extend the current rate at 3.4 percent for another year. They figure the Senate must buy time to work through a comprehensive solution that goes beyond interest rates.

More than 38 million Americans owe $1.1 trillion in student debt, according to the Consumer Financial Protection Bureau. The current debate on Capitol Hill would address rates on new loans, yet do nothing to solve a financial burden that appears to be drastically reshaping the economy.

The price of higher education, the principal on the existing loans, and the relatively bleak employment picture for new grads are not part of the July scramble over interest rates.

“We need frankly at least one more year so that we can sit down and do this correctly,” Reed said on the floor. “We really have to fix this. And not just simply changing around interest rates. But also, what about paying down the debt that’s outstanding? A huge problem, a $1 trillion problem. What about the incentives for lowering the cost of college? What about the other structural changes that we have to make?”

TIDAL WAVE OF DEBT
Lawmakers extended the current 3.4 percent rate last year in the heat of a presidential election, knowing that the higher interest rates could be a nasty October surprise for parents who had just written tuition checks.

House Republicans already passed their solution on May 23. It would add 2.5 percent to the 10-year Treasury rates. But the interest rates would fluctuate each year, instead of being fixed over the life of the loan.

The House measure would also generate $3.7 billion in revenue for the government, a non-starter for Democrats who oppose using student loans to cut the deficit.

None of this tackles the broader economic issues caused by the tidal wave of student debt. Most academic research has found that college grads have higher earnings and lower unemployment rates than those who never advanced beyond high school.

But since 2000, annual wages have fallen for young college grads after inflation by $3,200 to $34,500, according to the progressive Economic Policy Institute. This means that the financial returns for obtaining a degree have dropped – making it harder to service the debt.

The challenge will be sorting through a policy solution in one year, the timeline stressed Thursday by Sen. Reed.

Hours before the floor speech, the left-leaning Center for American Progress published some possible fixes from David Bergeron, the former acting assistant secretary for post-secondary education at the Education Department.

Now a vice president at the think tank, Bergeron recommended expanding the “Pay As You Earn” policy unveiled last year by President Obama to all borrowers. That initiative, known as PAYE, only applies to borrowers who received a loan after October, 2011. It caps repayment on federal loans at 10 percent of discretionary income and after 20 years would retire any remaining debt.

In his 2014 budget proposal, Obama has pushed for broadening PAYE. Bergeron would also favor the introduction of a refinancing mechanism so that existing borrowers could join the new system.

“Too often we deal with the crisis of the day and we don’t really deal with the longer term problems that our system faces,” Bergeron said. “It’s one of these issues that is being crowded out by trying to address this short-term problem [of interest rates].”

The impact of student debt extends to other parts of the economy beyond higher education. The Bipartisan Policy Center released an infographic on Thursday that explores the possible consequences for home sales.

Millennials stuck with college and graduate school loans will have less money saved for a down payment, since a large share of their income has gone to repaying the debt. Their credit scores will also be lower because of the debt, influencing their ability to qualify for a mortgage.

This has repercussions for baby boomers approaching retirement.

“When seniors want to downsize or move to a more appropriate home to age in place, there aren’t as many available buyers,” explained Pamela Hughes Patenaude, director of housing policy at the Bipartisan Policy Center. She noted that markets in places such as Detroit, Buffalo, and Columbus, Ohio, could suffer from the lack of millennials with the resources to purchase a home.

It also has delayed the formation of new households, contributing to the weak recovery from the 2008 financial meltdown. Younger Americans are now more likely to live with roommates or crash at their parents’ houses, as a sizable chunk of their salaries go toward their college loans.

“Student loan debt,” Patenaude said, “can now be as high as someone’s rent or mortgage payment.”