WASHINGTON, D.C. | May 31, 2013 -
President Obama's 2014 budget calls on Congress to prevent a doubling of interest rates on student loans and make the rates "more market-based." Last week House Republicans and four Democrats voted to prevent the rates from doubling and make the rates more market-based.
Naturally, Mr. Obama is sitting down with the leaders of both parties in a good-faith effort to iron out their remaining differences before the July 1 rate increase. Just kidding.
After hurling a veto threat at the House, Mr. Obama is hosting a White House media event Friday morning. As his spokesman Jay Carney described it, "the President will be joined by college students here at the White House for an event where he will call on Congress to prevent student loan interest rates from doubling on July 1." Does Mr. Obama realize he can't run for re-election again?
House Education Chairman John Kline's bill sets floating rates on new Stafford loans at the 10-year Treasury rate plus 2.5%, while also protecting borrowers by capping the rates at 8.5%. Under this plan, a borrower can consolidate his loans after graduation to achieve a fixed rate.
Mr. Obama's plan is purely for fixed, not floating, rates at the 10-year Treasury rate plus 0.93% or 2.93% depending on the type of Stafford loan, and it has no rate cap. We wish both the House and Mr. Obama would drive a harder bargain on behalf of the taxpayer, but they aren't separated by a difference of philosophy. A spread of 93 or 293 basis points means the President cares about young people, but 250 basis points signifies unspeakable cruelty?
So too with so-called PLUS loans, for which Mr. Obama favors the 10-year Treasury rate plus 3.93% on a fixed-rate loan with no cap, while Mr. Kline wants Uncle Sugar to charge a floating 10-year Treasury rate plus 4.5%, while capping rates at 10.5%.
Under either plan, rates for new Stafford loans for undergraduates will not nearly rise all the way to 6.8% from 3.4%, as they are scheduled to do on July 1. But the White House likes to run against a doubling of rates even when, as in this case, they are running unopposed. It has been a good political issue for Team Obama in the past, and there's another reason they may regard it as favorable ground to attack imaginary adversaries.
That's because there is a legitimate dispute over another part of the Obama loan program, but it has more downside for the White House than pretending to be in a fight over interest rates.
As he has in the past, Mr. Obama is again seeking to expand the opportunities for borrowers to avoid paying their bills on time and in full. The White House wants to allow more people to take advantage of a program called Pay As You Earn. As the Obama Administration describes it, a borrower's repayments are "capped at 10 percent of their prior-year discretionary income," with any remaining balances forgiven after 20 years.
You've read about default rates rising on federal student loans, and it's all true, but perhaps as dangerous to taxpayers is the exploding opportunity in recent years for borrowers to choose debtor-friendly repayment options while technically avoiding default. If enough people can be declared eligible for so-called income-based repayment plans that reduce their monthly bills and even their principal, does it really matter what the official interest rate is? Taxpayers will still pay in the end.
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