In Part One of our collection of Student Loan Legislation Plans, we looked at the plans proposed by President Obama and the House. Today we shift our focus over to the Senate and the plans to change the bankruptcy laws. If none of these laws are enacted by July 1, 2013, federal interest rates on student loans will jump up to 6.8%.
Senate Democrat Plan #1
Senators Jack Reed (D-R.I.) and Dick Durbin (D-Ill.) call for a law that would set student loan interest rates based upon the short-term rate that the government can borrow money. As of this week, that rate is .045%. The Department of Education would then add an administrative rate to this loan. That exact additional rate has not yet been calculated, but the maximum interest rates on this plan would be 6.8% for need based loans and 8.25% for the rest.
For borrowers, if the rate is going to be set based upon the market, setting it according to the short-term rate is ideal. The provision for administrative costs also seems very logical as it would allow the Department of Education to calculate things like risk of default and forgiveness into the loan. The end result would be a system where the government is no longer making $51 Billion is a single year.
Like all student loan proposals that only address interest rates, this bill would not fix the rising cost of college and it would not do anything to help the people that are in over their heads on student loans. The one major downside specific to this loan is the administrative rate determined by the Department of Education. As previously stated, this could factor in a variety of components and be very useful, but if these loans are poorly managed by the Department of Education, the cost would be passed on to borrowers.
Chances of Passing
This bill will have a tough time getting passed. For starters, even though it is brought by Democrats, it does not have the backing of the White House. Secondly, as you will see, there are several plans proposed by the Democrats in the Senate. This division among party members will make passage of any individual bill more difficult.
Senate Democrat Plan #2
Senator Elizabeth Warren (D-Mass.) made her student loan bill her very first piece of proposed legislation. This bill would set the interest rate for student loans at .75%, which is exact the same rate at which banks can borrow money from the government. This bill would apply only for one year and apply only to new loans.
For new loans, this bill would provide the lowest interest rates of all the proposed bills. Its quite intentional that the rate was set at the same rate banks can borrow from the government. The press this bill is receiving illustrates how normal everyday people are treated so much differently than large corporations. While there are many obvious differences between the two, because of the difficulty of bankruptcy for student loans, the risks for both are very low. Its quite possible that Ms. Warren is using this bill as a stepping stone for more far reaching student loan legislation.
Even if Ms. Warren does view this as a necessary step for making a major difference on student loans, the fact remains that this bill would apply only to new loans and only for a year. Illustrating a principal is one thing, but far more will need to be done to make any sort of meaningful difference in the student loan crisis.
Chances of Passing
Ms. Warren has a reputation as a consumer advocate and this bill is in her wheelhouse. However, the lack of support from the Obama Administration, coupled with a conservative House, make the odds of this bill passing very low.
Senate Democrat Plan #3
Senators Jack Reed (D-R.I.), Harry Reid (D-Nev.), and Tom Harkin (D-Iowa) have introduced a bill that would keep the interest rates on student loans at their current 3.4% for two more years. This is the exact same legislation as proposed in the House by Representative Joe Courtney.
The best thing about this particular plan is that it prevents the July 1st rate hike. Though it is just a delay of the inevitable, it provides time for Congress and the President to come together on more far reaching legislation.
This is the bill that keeps getting passed year after year. While it is better than a rate increase, it does not address the fundamental issues of the student debt crisis.
Chances of Passing
Given that there is similar legislation in the House and the fact that substantially the same bill was passed last year, it has a decent shot at passing.
Senate Republican Plan
Senators Tom Coburn (R-OK) and Richard Burr (R-NC) have put together a plan that is best described as a hybrid of the President’s plan and the House Republican’s plan. Like the House Republican plan, this plan calls for all borrowers, need and non-need based, to have a rate of 3% above the 10-year Treasury Bond rate. This would mean about a 5% rate for current borrowers. Like the Obama plan, the interest rate would be fixed for the life of the loan.
From a legislative perspective, it would seem to be a middle ground between the President’s plan and the House Republican’s plan. It would also prevent the rate from jumping up to 6.8% next month.
The downside to this plan for most borrowers is that it still raises the interest rate on their federal loans. While paying 5% is lower than the scheduled 6.8%, it is still much larger than the current 3.4%. Another issue is that when the economy improves, student loans will become very expensive once again.
Chances of Passing
The President has promised to veto the bill that passed in the House. This bill takes that house bill and puts in the provisions that the President wanted. Thus, this bill has perhaps the best chance of passing.
In 1998 Congress passed the law that created the “undue burden” standard for discharge of federal student loans in bankruptcy. In 2005, the law was modified to include private loans. Representative Steve Cohen (D-Tenn.), has sponsored a bill that would reverse the 2005 change in the bankruptcy law. Senator Dick Durbin (D-Ill.) has introduced a similar measure in the Senate.
These changes would be more fundamental alterations to the student loan laws. Not only would it offer immediate relief to those struggling with private loans and bankruptcy, but it would also encourage more responsible lending as banks and other lenders would want to avoid dangerous loans. In theory, this could also lower the price of college. If less loans are available, less funds are available, and colleges must alter their prices to adjust to the market changes.
This particular bill would apply only to private loans. Many lenders also point out that increased risk of bankruptcy would result in higher interest rates. This would be bad news for people who will need these loans in the future.
Chances of passing
There seems to be limited support for these changes as the student loan legislation discussion has been dominated by the subject of interest rates. The lenders and banks have a very strong lobby and do not want to see their loans disappear in bankruptcy. Therefore, the odds of this legislation passing are very low.
The Student Loan Sherpa Plan
This website has also proposed comprehensive student loan legislation. The goals of the Sherpa Plan are to lower the cost of a college education, provide a pathway to bankruptcy, and increase lender responsibility.
If you were a member of Congress would you vote for any of these bills? Why or why not?