prevailing rate of the 10-year Treasury note at the beginning of the academic
year in which the loan is taken.
Students would be protected to some degree from a big spike in interest rates in the future, thanks to another provision in the budget request that would expand so-called income-based repayment plans for federally subsidized borrowers. The proposal would ensure that graduates don't have to spend more than 10 percent of their income on loan repayment, no matter how much they owe in federally backed loans, or where interest rates stood when they borrowed the money.
Expanding income-based repayment plans is a "more effective insurance policy" for borrowers than placing a cap on student- loan interest rates, said Carmel Martin, who at the time was the U.S. Department of Education's assistant secretary for planning, evaluation, and policy development in an April 10 conference call with reporters. "In order to have a cap, we would have to charge students more in order to hedge against the possibility that rates would go up to unmanageable levels in the future," she explained.
But Lauren Asher, the president of the Institute for College Access and Success, which works on college-access issues, said that income-based repayment plans are "no substitute" for a cap on student loans.
An interest-rate formula like the one the president is proposing could ultimately hinder college access, Ms. Asher said. According to recent projections by the Congressional Budget Office, interest on the 10-year Treasury note could rise to roughly 5 percent by fiscal 2017.
And under the president's proposal, the federal government would add an additional percentage for different types of loans, including 0.93 percent for subsidized Stafford Loans, which tend to help low- and moderate-income borrowers and 2.93 percent for unsubsidized Stafford Loans, another type of federally backed loan for students. That means some students could be paying about 8 percent in interest rates in just a few short years, Ms. Asher said.
But others argued that it's tough to gauge how big a role interest rates play when it comes to college access.
"There's not much evidence that [college] choices are being made by people acting as human spreadsheets," said Kevin Carey, the director of the education policy program at the New America Foundation, a think tank in Washington. Student loans are different from, for example, car loans, for which borrowers are typically able to figure out exactly what their monthly payment will be before they make the purchase, he explained.
And, Mr. Carey added, the administration's plan to pair the market-tethered interest rate with a "very generous" income-based repayment program has "a lot of merit" because the repayment plan "accomplishes the policy goal that subsidized interest rates had accomplished in the past," namely, keeping loans affordable.
This isn't the first time that Congress and the administration have had to cope with an interest-rate jump. Student-loan rates were scheduled to double last summer from 3.4 percent to 6.8 percent, and the issue became a part of the presidential campaign when both President Obama and Mitt Romney, the then presumptive Republican nominee, came out in favor of keeping the lower rate.
Congress passed legislation to leave the 3.4 percent rate in place for one year, mostly as part of an election-year stopgap measure.
Meanwhile, the president's budget would also include a slight boost for Pell Grants, which help low-income students attend college. The proposal would increase the maximum Pell award by $140, from $5,645 in award year 2013-14 to $5,785 in award year 2014-15.
The administration would also seek to prod colleges to hold down the cost of tuition, while improving outcomes for students, by creating a $1 billion edition of its Race to the Top franchise, specifically aimed at higher education. The program would reward up to 10 states that keep tuition increases in check while improving student outcomes, such as graduation rates, and experimenting with new ways of delivering content to students.
The competition also would include something for K-12: States would be rewarded for smoothing the transition between high school and college.
(c)2013 Education Week (Bethesda, Md.)
Distributed by MCT Information Services
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