Education

Expert: Link student loans to financial markets

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Robby Soave Reporter
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The bipartisan student loan deal, which Senate Majority Leader Harry Reid has vowed to block, is the best starting point for formulating a logical loan interest rate, said a financial expert at the American Enterprise Institute.

Linking interest rates on student Stafford loans to the 10-year Treasury note is “what you would do if you were a rational financial actor,” said Alex Pollock, a resident fellow at AEI, in an interview with The Daily Caller News Foundation.

Pollock said the government should calculate the rate based on a number of factors that include operating costs and the likelihood of default.

“You add those up and that will get you to a fair price for these loans,” he said.

The current, subsidized interest rate on student loans is 3.4 percent, but will double to 6.8 percent on July 1 unless Congress intervenes. With the deadline rapidly approaching, legislators have concocted several different plans, but the one with bipartisan support has one serious roadblock: Harry Reid.

The Bipartisan Student Loan Certainty Act would peg interest rates on student Stafford loans to the financial market. This would likely keep them low for now, but could signal rate hikes in the future.

West Virginia Democrat Sen. Joe Manchin planned to introduce it in the Senate on Thursday.

But Reid has vowed to block the legislation. He objects to a provision in the bill that would take $960 million in savings and use it as a down payment on the national debt. Senate Democrats want to use the savings to help college students and their families.

“There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families, instead of closing tax loopholes for the wealthiest Americans and big corporations,” said Adam Jentleson, a spokesperson for Reid, in a statement to the Associated Press. “Democrats continue to work in good faith to reach a compromise but Republicans refuse to give on this critical point.”

President Obama has expressed enthusiasm for some aspects of the deal. His budget plan, released earlier this year, included a provision to link interest rates to financial markets.

“Why Senate Democrats continue to attack the president’s plan is a mystery to me, but I hope he’s able to persuade them to join our bipartisan effort to assist students,” said Don Stewart, a spokesperson for Senate Minority Leader Mitch McConnell.

The subsidized interest rate on student loans currently stands at 3.4 percent, but will automatically double to 6.8 percent on July 1st unless Congress intervenes.

A number of Senate Democrats have proposed their own plans. Massachusetts Democratic Sen. Elizabeth Warren wants the Federal Reserve to subsidize student loans at the same rates as bank loans. The proposal is the only fair way to make sure U.S. students get as much assistance from the government as big banks do, Warren said. Skeptics of her plan, however, point out that students are a much riskier investment than banks, since they frequently default on their loans.

“Since students have no previous credit history, they present more risk than other borrowers,” wrote Dr. Jenna Robinson, a spokesperson for the John W. Pope Center for Higher Education Policy, in a previous statement to The Daily Caller News Foundation.

New York Democrat Sen. Kirsten Gillibrand and Ohio Democrat Sen. Sherrod Brown have proposed bills that would freeze interest rates at 3.4 percent for the next two years. They also wants to give students the option of refinancing their loans at lower rates.

The Republican-led House of Representatives has already passed a student loan bill that would allow interest rates to fluctuate from year to year, based on financial markets. The president has threatened to veto that bill if it reaches his desk, but House Republicans have signaled a willingness to compromise on the issue, if any such legislation passes the Senate.

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Content created by The Daily Caller News Foundation is available without charge to any eligible news publisher that can provide a large audience. For licensing opportunities of our original content, please contact licensing@dailycallernewsfoundation.org.