A student loan compromise

A student loan compromise

Los Angeles Times: A new Senate proposal would spare millions of college students from having to pay a significantly higher interest rate on the loans they take out this school year, but it would probably lead rates to rise in the years to come. Nevertheless, the tentative deal is a good one for taxpayers and students alike. It’s also a welcome reminder that lawmakers can reach bipartisan deals on politically polarized issues, and that they can resist the temptation to avoid hard choices by relying on expensive stopgap fixes.

At issue are the rates charged on loans issued directly by the government to students. Since mid-2006, many undergrads have paid 6.8 percent for “unsubsidized” Stafford loans— that is, loans with interest payments due from the day they’re issued. Low- and moderate-income undergraduates who qualified for “subsidized” Stafford loans — with no interest due until they leave college — paid as little as 3.4 percent, but that rate jumped to 6.8 percent for loans issued after July 1.

As the Obama administration acknowledged in its budget proposal earlier this year, fixed-interest-rate loans are not sustainable over the long term. Washington winds up either profiting from student borrowers or losing money on them, depending on the vagaries of the market for government bonds (and on graduates’ ability to find jobs). That’s a haphazard approach.

Congressional Democrats initially resisted GOP efforts to tie the interest rate on the loans issued each year to the government’s current borrowing costs, arguing instead for another temporary extension. On Thursday, however, leaders of the two factions agreed on a proposal to set new interest rates annually for loans issued each year. While lawmakers should embrace the Senate proposal on interest rates, they have much more work to do.