Shifting Burden On Student Loans
By Michelle Singletary
Sunday, April 18, 2004; Page F01
If you have a student loan, there's a debate in Congress you should be following.
On the legislative table is a proposal to change the interest rate on consolidated federal student loans from fixed to variable.
One of the chief forces behind this lobbying effort is Sallie Mae, the nation's leading provider of education loans, which wants legislation that would prevent borrowers from consolidating their loans to a fixed rate, the way they can now.
On the other side are consumer advocates who say borrowers could pay nearly twice as much interest if the rate on consolidation loans is made variable.
Interest rates on federally based student loans are generally variable when initiated. But when borrowers consolidate, they are allowed to bundle their various loans into one fixed-rate loan, and one monthly payment, that can be stretched to as long as 30 years.
Over the past few years, the variable student loan rate, which is determined by the government, has been at record lows. Those who consolidate their loans also benefit from the low rate, which is currently 3.4 percent.
For obvious reasons, millions of borrowers have been rushing to consolidate.
But all this consolidation at low rates presents a problem: It could cost the federal government billions of dollars. That's because as interest rates rise, the government has to pay a higher subsidy to the lenders who locked in borrowers at low rates. Essentially, the government guarantees consolidation lenders a certain base interest rate.
Kate Rube, higher education associate for the Public Interest Research Group, contends that if the interest rate on consolidation loans were made variable, the average borrower with a $20,000 student loan debt would pay an additional $7,807 in interest over a 20-year repayment.
"Given the astronomical rate at which student borrowing is increasing, we need Congress to come up with ways to make loan repayments more affordable, not more expensive," Rube said.
Rube believes Sallie Mae is protecting its profit margins, not the interest of the federal treasury.
But Sallie Mae officials say they are concerned that the potential increase in subsidy payments will mean less funding for new borrowers.
"The money should be spent on access as opposed to heavy subsidies for graduates who already benefited from the student loan program," said Tom Joyce, vice president for corporate communications of Sallie Mae.
Just look at the facts, Joyce urged me. He insisted that I read a recent report that he said proves fixed-rate consolidated loans are fiscally irresponsible.
The report, "The Fiscal and Social Costs of Consolidating Student Loans at Fixed Interest Rates," was financed in part by Sallie Mae and co-authored by Kevin Hassett, a resident scholar and director of economic policy studies at the American Enterprise Institute, and Robert Shapiro, chairman of Sonecon, an economic consulting firm, and a former undersecretary of commerce for economic affairs in the Clinton administration.
Hassett and Shapiro conclude that federal consolidation of student loans will cost taxpayers at least $14 billion in interest-rate subsidies on existing loans and, if legislative remedies are not enacted soon, an additional $21 billion on consolidation loans made between 2005 and 2011.
"A variable rate will fix the subsidy problem," Hassett said in an interview.
But is that the only solution?
Why isn't Congress looking at the possibility of reducing or even getting rid of the very reason for the growing federal burden -- the lender subsidy?
Why is the only solution to this subsidy crisis an increased financial burden to borrowers?
It's not as if the borrowers stop needing help once they leave school. According to a survey released last year by Cambridge Consumer Credit Index, 68 percent of the people polled said their outstanding student loans prevented them from making purchases such as a house or a car.
"We should start with the premise that the federal student loan program is being operated for the benefit of students to achieve an education," said Rep. George Miller (D-Calif.), the ranking minority member on the House Education and the Workforce Committee. "It is not to be operated for the benefit of the lenders alone. But more and more, the lenders have an entitlement within this program."
In an interview with Shapiro, I raised the option of eliminating the lender subsidy. He thinks that without the government's help, lenders would pull out of the student lending market because of the difficulty in making loans to people with little credit history.
I respectfully disagree.
The student loan industry would make healthy profits even without the subsidies.
In fact, here's what Sallie Mae says in a filing with the Securities and Exchange Commission: "Student loans are 98 percent guaranteed by the federal government and as such represent high-quality assets with very little credit risk and predictable earnings streams that are relatively easily financed."
Doesn't that sound as though the interest subsidies are just government gravy to lenders?
