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The Washington Examiner: Fixing the Problems in Student Lending

January 25, 2013
Opinion Editorial

The federal student loan program was created to help students pay the high cost of tuition. But as college tuition continues to skyrocket, students who already face staggering amounts of debt must now deal with the added threat of the Stafford loan interest rate doubling.

The good news is that Congress can do something about this. We can stop using student loans as a piggy bank, and instead develop reforms that solve the system's problems and place America's next generation on a path to prosperity.

The interest rate on subsidized Stafford loans is currently set at 3.4 percent. The scheduled increase to 6.8 percent in July could cost the average borrower $1,000 over the life of his or her loan.

Even at the current rate, many graduates are defaulting on payments, which can be attributed to the fact that half of recent college grads are struggling to find work in the ongoing stagnant recovery. According to Equifax, student loan delinquencies involving payments more than three months late rose 14.6 percent in 2011 from the year before.

Unfortunately, over the last 20 years, students have seen the federal government gradually move to overtake all aspects of student loans. This has gotten us into the mess where we find ourselves now.

The majority of student loan interest rates were originally fixed at 6 percent. They were switched to a variable rate in 1992. Congress later voted, in 2002, to set them back at a fixed rate of 6.8 percent beginning in July 2006. In 2007, Democrats chose to temporarily phase down the subsidized Stafford loan interest rate until it reached 3.4 percent last July.

Borrowers who took out student loans when the rate was still variable are currently enjoying an interest rate of just 2.36 percent. If we went back to a variable rate today, students would benefit from record-low interest rates, and they would save thousands of dollars over the life of their loans.

In 2005, House Republicans passed a provision that would have blocked the switch to the 6.8 percent fixed rate, but the Senate did not agree to the provision. As a result, interest switched from a variable rate to a fixed rate of 6.8 percent on July 1, 2006.

As rates changed, so did the level of government involvement in student loans. In 1992, the Direct Loan Program was created, supposedly to compete against the private lenders' program, the Family Federal Education Loan program. Even though schools and universities preferred the FFEL program by 3-to-1, the Obama administration eliminated it as part of its health care law. It was not only a massive takeover of our health care system, but also a permanent government takeover of the private student loan industry.

In the Washington world of budget gimmicks, the high cost of this health care law was paid off the backs of our young graduates -- through interest payments on their subsidized Stafford loans. We believe that the elimination of this private industry is the wrong solution. But what really gets us mad is they did not do this in order to help students, but to pay for President Obama's health care bill. The government is charging students a 6.8 percent interest rate for a loan that only costs 2.8 percent to originate, and using the profit to fund yet another entitlement program.

Obama is now using this issue, making demagogic speeches across the country and attacking Republicans for a problem he did nothing about as a senator -- in fact, he skipped the vote. This sets the wrong tone. It's time for Republicans and Democrats on both sides of the aisle to work diligently on this issue in a bipartisan way. Our student loan policy should aim to help current students and future students receive an affordable education, not to provide a campaign issue for our reelection.

Reps. Phil Roe, R-Tenn., and Tim Walberg, R-Mich., are members of the House Education and Workforce Committee.

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