What Rep. Ellison says about solutions to a Stafford Loan rate hike

Talking about rates MPR Photo / Alex Friedrich

As I posted earlier, Democratic U.S. Rep. Keith Ellison has signed onto legislation again that would prevent the subsidized Stafford Loan interest rate from doubling July 1 from 3.4 percent to 6.8 percent, where it once used to be.

The doubling was originally set to occur last year, but after a lot of election-year debate, got a one-year reprieve from Congress.

Ellison, part of a group of politicians who want a two-year extension, visited the University of Minnesota late yesterday afternoon for a panel discussion on that and other topics related to student debt.

He told a group of about two dozen students:

“If you are not moblized in your own interest, someone else is mobilized against your interest — or not for your interest, at least. … Do not allow Congress to let your student interest rates to double, OK?”

The essential debate has changed little since last year, although a variable market rate has appeared as an alternative — something Ellison didn’t rule out.

One critic of an extension told me yesterday he still thinks the government should not interfere with market interest rates. And Mark Kantrowitz of financial-aid Website FinAid.org questioned last year whether government intervention would be too costly and help out too few students who wouldn’t end up saving that much anyway.

Last month, Kantrowitz repeated to Southern California Public Radio his estimate that allowing the rate to double would mean students would pay $7-8 extra per month for each year borrowed. He said the money spent on keeping rates low should go toward grants, which would lower the amount students needed to borrow.

(One point experts have stressed: The change would not affect existing loans — only new ones.)

News reports have characterized the two-year extension as a short-term fix until Congress could work out a long-term solution to student debt. Ellison didn’t deny that, saying a long-term solution is needed. But he also said he’d prefer the 3.4 percent be permanent, and that two years for such an extension was what the bill’s authors thought was politically possible.

One alternative to the fixed rate, versions of which have been proposed by the GOP and Obama administration, is to allow the Stafford interest rate to vary with the market. The Obama version reportedly would provide a cushion that would keep it a little lower than the market rate.

At the panel discussion, Taylor Williams, president of the Minnesota Student Association, which represents students at the U, said that if Congress does consider such a variable market rate, it should institute a cap.

That’s because although a variable market-based rate might be popular now when interest rates are low, rates could go much higher — beyond the currently contested 6.8 percent — if the market picks up in the future. Such high rates could make the debt problem even worse, critics say.

Williams told the group:

“Something like (a variable market rate) wouldn’t be the end of the world for students — but it would be without a cap.”

After the discussion, Ellison said he’s not necessarily against a variable market rate with a cap, but said the federal government has an important role to play in college affordability:

“If you’re talking about a loan that someone is taking out for a business or something, that’s one thing. But I think education has such a public importance that the government needs to make sure that student education — including student loans — are affordable.”

And what would be an acceptable cap?

With a chuckle, he said:

“Hey, 3.5 percent. You can go lower — I’m all right with that.”

The panel discussion didn’t say much about a recent news report that the feds have a 36 percent profit margin on a student-loan business that brings in $34 billion a year. Student advocates in Washington have seized that issue, saying the U.S. government should not be making money off a program that puts students so deeply into debt.

When asked about it after the discussion, Ellison said:

“I’d like to see us plow the money into education — reducing the cost of education. … Our children can not be a profit center for somebody.”

Ellison said he didn’t know “where to put every penny” of loan profits, but said the cost of the loans to students — essentially the interest rate, or even the principal — should be reduced.