The Tech - Online EditionMIT's oldest and largest
newspaper & the first
newspaper published
on the web
Boston Weather: 50.0°F | Light Rain and Windy

Cut in Student Loan Rates Proposed Fri. By House Democrats

By Diana Jean Schemo
THE NEW YORK TIMES


WASHINGTON

House Democrats on Friday unveiled a bill that would cut interest rates on federally subsidized loans to college students by half over the next five years.

They said they would finance the $6 billion measure by increasing costs that lenders pay to the government and reducing the largest lenders’ government-guaranteed profits.

The bill, one of half a dozen that the new House majority had placed on its 100-hour agenda, underscores the Democrats’ all-out effort to consolidate gains made in November among middle-class voters.

“How to pay for a college education has become a primary concern for students and families across this country, a concern that Congress must urgently address as part of our goal of strengthening America’s middle class,” said Representative George Miller, chairman of the House Education and Labor Committee.

The measure is expected to pass in the House, where it is scheduled for a vote tomorrow. Its future in the Senate is less certain, although the concept behind it is supported by Democratic leaders there, including Edward M. Kennedy, chairman of the education committee, who is planning to introduce a similar bill.

House Republicans, who in trying to contain college costs have focused in recent years on restraining tuition increases, complained Friday of being shut out of the process of writing the new bill and said they would offer amendments before Wednesday’s vote.

“I’m hopeful we can work in a bipartisan way to build upon it, including with reforms that actually make college more affordable and more accessible for low- and middle-income students,” said Representative Howard P. McKeon of California, the ranking Republican on Mr. Miller’s committee.

That theme was echoed at the White House. Blain Rethmeier, a spokesman, said the Bush administration would support efforts in Congress to ease students’ burden, but added that “colleges have the central role to play in ensuring access to affordable higher education.”

Student debt has grown exponentially in recent years, in tandem with college costs that routinely outpace inflation. The average college student now graduates with nearly $18,000 in debt. The Democratic proposal would benefit many such students: the 5.5 million a year who receive subsidized Stafford loans.

The measure unveiled Friday would make good only in part on Democrats’ campaign promise to halve the interest rates on student loans. Democrats had never said that the cut would not fully take effect until 2012 or that the pledge applied only to subsidized Stafford loans.

Unlike Pell grants, which go to students with family incomes under $40,000, Stafford loans are also tapped by middle-income students. Some 75 percent of students holding Stafford loans come from families with household incomes under $67,000, just above the median income for a family of four, which is $65,000, said Luke Swarthout, advocate for the U.S. Public Interest Research Group Higher Education Project.

The bill would cut the interest rates on subsidized Stafford loans for undergraduates — loans to graduate students would not be affected — to 3.4 percent from the current rate of 6.8 percent, in stages. The first reductions would affect new loans made after July 1.

According to the Project on Student Debt, a nonprofit group, the bill would save a student who graduates from college with $20,000 in debt about $4,000 over the 10-year life of a loan.

Under the program of subsidized Stafford loans, the government guarantees lenders a rate of return that can be higher than the interest rate paid by the student. In trying to finance their proposal, House Democrats decided that for the largest lenders, the bill would lower that rate by 0.1 percentage point. It would also raise fees that lenders pay to the government, and cut payments that lenders receive if a student defaults.

While applauded by student advocacy groups, the bill drew immediate criticism from the student loan industry, which complained that it had already absorbed $12 billion in reduced payments from the government as part of a larger, Republican-led deficit reduction effort last year.

“What we’re really seeing is Peter being robbed to pay Paul,” said Tom Joyce, a spokesman for Sallie Mae, the nation’s largest holder of student loans. “When you continue to cut and cut again, eventually who you’re hurting is not the banks but the students and the parents themselves,” said Mr. Joyce, suggesting that such reductions would ultimately impair services to borrowers.

Mr. Swarthout, of the Higher Education Project, called the bill “a good first step to making college more affordable.” He added, “It will save millions of students thousands of dollars on their debt.” He said that by showcasing the issue in its first days in power, the new Congress was sending a strong signal to student borrowers, and creating high expectations among them for further aid.

“You cannot put college affordability as a top agenda item and then walk away after cutting interest rates,” he said.

While Democrats in the Senate have embraced the goals of halving interest rates, action there will not be as swift as in the House. Melissa Wagoner, a spokeswoman for Mr. Kennedy, said committee hearings would most likely begin on Jan. 25.

Mr. Kennedy’s bill would phase in similar cuts in interest rates not only in subsidized Stafford loans but also in another loan program. It is broader than the House bill in other ways as well, raising Pell grants to a maximum of $5,100 a year, from $4,050.

Katherine McLane, a spokeswoman for Education Secretary Margaret Spellings, said Ms. Spellings supported an increase in the Pell grants.