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Hearing Highlights Benefits of Market-Based Student Loan Interest Rates

The U.S. House Education and the Workforce Committee, chaired by Rep. John Kline (R-MN), today held a hearing entitled, “Keeping College within Reach: Examining Opportunities to Strengthen Federal Student Loan Programs.” During the hearing, members and higher education experts discussed the need for a long-term solution to the problem of Stafford Loan interest rates.

“Last summer, debate about student loans reached a fever pitch thanks to a scheduled increase in subsidized Stafford Loans made to undergraduate students. The president began touring college campuses, calling on Congress to prevent the increase that his own party set in motion back in 2007,” Chairman Kline stated in his opening remarks. “As I said at the time, no one wants to see student loan interest rates increase, particularly as young people continue to struggle with high un- and underemployment. But we need to move away from a system that allows Washington politicians to use student loan interest rates as bargaining chips, creating uncertainty and confusion for borrowers.”

In 2012, Congress agreed to temporarily extend a lower interest rate on subsidized Stafford Loans made to undergraduate students. Unless Congress takes additional action, the lower rate will expire on June 30, 2013.

Justin Draeger, president of the National Association of Student Financial Aid Administrators (NASFAA), testified, “This is the second year in a row policymakers have been left scrambling to keep interest rates down for subsidized Stafford Loan borrowers. Last year we kept interest rates from doubling from 3.4 percent to 6.8 percent for these borrowers at a cost of roughly $6 billion. To partially offset that expense, Congress reduced eligibility for subsidized Stafford loans.”

“As has become accepted business practice, we made another piecemeal patch that took funding away from some students to provide it to others, except in this instance we provided one benefit and took away another from the same students. In effect, we robbed Peter to pay Peter!” Mr. Draeger said, adding, “NASFAA continues to advocate for a long-term, market-based solution to these problems by returning to a variable interest rate.”

Jason Delisle, director of the New America Foundation’s Federal Education Budget Project, said, “If there is one thing recent debates about interest rates on federal student loans have demonstrated, it is that Congress needs to develop a rational, long-term plan for setting rates. Currently, the program charges borrowers the same fixed interest rates no matter what happens to other interest rates in the economy. And the rates are arbitrary.”

Mr. Delisle recommends Congress set a market-based interest rate for new student loans based on the 10-year Treasury note rate, plus 3 percent. “Rates would still be fixed and borrowers would receive lower rates when rates were low and higher rates when rates rise,” he explained.

Massachusetts Institute of Technology Professor of Finance Deborah Lucas described the problems with the existing student loan interest rate system, stating, “For students, the current policy creates large swings in the value of government assistance from year to year. Similar students that attend the same school but in different years receive very different amounts of support: subsidies will be small when market interest rates are low and large when rates are high. As well as raising fairness concerns, the volatility makes it more difficult for prospective students to assess the affordability of pursuing a higher education.”

As Dr. Lucas also noted, “Market-indexed rates would reduce the volatility of subsidies for borrowers and taxpayers, and also help to stabilize the budgetary costs of the programs.”

In the coming weeks, House Education and the Workforce Committee Republicans will continue to explore legislative proposals to better align student loan interest rates with market values. To read witness testimony, opening statements, or watch an archived webcast of today’s hearing, visit

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