Republican Senators Introduce Bill To Set Long-Term Student Loan Interest Rates
Senators Tom Coburn (R-OK) and Richard Burr (R-NC) introduced a bill that seeks to provide a long-term solution to set student loan interest rates on Stafford and PLUS loans. The Comprehensive Student Loan Protection Act would annually set an interest rate equal to the bond equivalent rate of 10-year Treasury bills plus 3 percent for these federal loans. This interest rate would be set annually for loans first disbursed in that award year and fixed for the life of the loan.
The proposal would require that the interest rate be derived from 10-year Treasury bills auctioned at the final auction prior to June 1. The additional 3 percent would then be added to this baseline. Using this methodology, the Secretary of Education, in consultation with the Secretary of the Treasury, would publish this number as soon as it became available. This applicable rate of interest would apply to loans first disbursed in the 12-month period between July 1 and June 30.
Under this methodology, federal Stafford and PLUS loans disbursed in the 2012-13 award year would have an interest rate around 4.6 percent, according to rates published by the U.S. Treasury. Since interest rates on federal loans would not have an interest rate cap, according to this proposal, interest rates could climb past the current 6.8 percent unsubsidized Stafford loan rate or the 7.9 percent PLUS rate in the future. In the early 1980s, the rate on 10-year Treasury bills exceeded 10 percent, topping out at just over 15 percent in 1981. However, in the last decade, the rate on 10-year Treasury bills hasn’t exceeded much more than 5 percent.
The Congressional Budget Office (CBO) estimates that this proposal would generate $52 billion in federal revenue over 10 years. The bill calls for these revenues to be used to reduce the deficit.
The proposal comes amidst gridlock on how to fund an extension to the existing 3.4 percent subsidized Stafford loan interest rate, set to double to 6.8 percent July 1. Republicans and Democrats have both put forth proposals to fund the one-year extension, but neither side is willing to accept the other's proposals.
“Aside from benefiting student borrowers and putting money back into the pockets of taxpayers over time, moving to a market rate it is just the right thing to do,” said Coburn in a press release. “Instead of spending our time debating which temporary fix will cause the least amount of pain in the short-term, my hope is that my colleagues will support a bill that provides a long term solution that will not require needless annual patching. This bill gives the system, students and the government certainty.”
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