Student Loan Fix Headed for White House

An unlikely coalition of students, lenders and members of Congress has reached an agreement that may ensure long-term gains for those who have to borrow money for college.
The House of Representatives in January approved legislation that would set student loan interest rates and rate formulas at levels acceptable to both student groups and banks. Several financial institutions had said they might be forced to leave the student loan business because of a scheduled 2003 change in how to calculate student loan interest rates.
Congress and the higher education community reached a short-term fix five years ago, but banks complained that the formula envisioned for next year would eat so far into profit margins that it would make participation in the loan process untenable in the future.
But the issue required careful negotiation, as advocates for students also wanted assurances that borrowers would realize savings when they pay off their educational loans.
The Senate approved the measure in December. The bill, S. 1762, now goes to the White House.
Under the bill now ready for President Bush's signature, the government would halt the planned change in the student loan interest formula planned for next year. However, the agreement also would set an interest rate for students of 6.8 percent by 2006.
Although students currently pay slightly lower rates now because of interest rate reductions, the system also allows banks to charge variable — and higher — rates based on yields on U.S. Treasury bonds.
Should banks need to set their interest rates above 6.8 percent in the future, the federal government may step in to cover the difference between this maximum allowable rate for consumers and the higher interest rates required by banks. House lawmakers say this would require the federal government to provide more than $3 billion through 2011.
"The agreement we reached in 1998 is now running against the clock," says Rep. Howard "Buck" McKeon, R-Calif., who chairs the House higher education subcommittee. Without a long-term extension past this year, "students and parents will be unable to obtain these low-cost loans."
Rep. George Miller, D-Calif., senior Democrat on the House education panel, says the agreement averts a potentially dangerous situation that arose last year when some lawmakers "proposed raising the interest rates on students to ensure these bank profits." The new bipartisan agreement provides for a "stable loan program without higher rates," he says.
As a result, the average student should save about $400, according to Miller.