Democrats Unveil New Loan Proposal

In a move that could change how college students shoulder the burden of loan debt, Democrats on the House Education and Workforce Committee proposed legislation last month that would allow student loans to be consolidated at either variable or fixed rates.

The Democratic proposal counters Republican plans, backed by the lending industry, to replace fixed-rate consolidation with consolidation at a variable market rate capped at 8.25 percent, which Republicans claim will save taxpayer dollars. Under committee chairman Rep. John Boehner of Ohio, the Republicans have committed to “revenue-neutral” legislation, claiming Democratic plans would impose an undue burden on taxpayers.

The proposals are part of the regular reauthorization of the Higher Education Act, which provides the aegis for federal direct student lending and Pell Grants.

The Democratic proposal, the College Opportunity for All Act 2005—cosponsored by Reps. George Miller, D-Calif., and Dale Kildee, D-Mich.—would allow students to lock in loans at a fixed percentage when interests rates are low or borrow at a variable rate capped at 6.8 percent during periods of higher interest.

Harvard College Director of Financial Aid Sarah C. Donahue said that, depending on market conditions, the plan could be advantageous to students borrowers.

“A proposal to move it to a variable rate is an attempt to have it be less expensive and also to even out the benefits to all borrowers,” Donahue said.

In a written statement, Miller claimed the change would save the average borrower $5,500 over the life of his or her loan.

“The way we look at the reauthorization of the Higher Education Act is it should be about students, period,” said Tom Kiley, who is Miller’s press secretary. “The real difference between the Democratic bill and the Republican bill is [the former] maintains that focus on students.”

Republicans counter that the Democratic proposal would be unfair to students, privileging those who could reconsolidate when loans are low and punishing those who could not. If interest rates dropped after students consolidated at a fixed rate, they would also be left with the higher rate.

“Students today have the lowest rates in the history of the loan programs. [Variable rate reconsolidation] ensures that all borrowers have access to low rates when the market is producing them, and it gives all borrowers the benefit of a loan cap,” said Alexa Marrero, spokeswoman for the House Committee on Education and the Workforce. “What a variable rate does is it allows all buyers to take advantage of the fluctuations of the market over time.”

The Miller-Kildee proposal would also double the Pell Grant maximum to $11,600 and establish a competitive grant program to facilitate funding for joint enrollment secondary-postsecondary programs.

“This legislation solves the dilemma we’ve put our students in by prioritizing grant aid over loans,” said Kildee in a written statement. “Additionally, when a student is forced to take out loans to pay for college, this bill ensures they receive the lowest interest rate possible. This bill is good for students and their financial future.”

Both Republican and Democratic proposals have pledged to eliminate federal subsidies to private lenders, but Democrats said the Republican proposal still leaves loopholes.

Kiley estimated the Democratic plan would eliminate 2.6 billion dollars in subsidies over the next five years in addition to the $17 billion that would be saved under the Student Aid Reward (STAR) Act, which would facilitate direct borrowing from the federal government without intermediaries. Democrats say that money would go to fund Pell Grants.

Whether the Democratic proposals will make headway in committee is uncertain.

“They are the majority, and they have their bill and we have ours,” Kiley said, adding that the Democrats would stand firm on certain positions.

Marrero said that, generally speaking, committee work will entail negotiation.

“The reauthorization process and the committee markup process is for providing an opportunity weigh the pros and cons of the proposals,” Marrero said. “Part of the goal is to look at what will be the best use of federal resources, to look at what will expand college access and be good for student borrowers.”

The competing proposals come at a time when some experts say student debt has reached levels that impose too great a burden on the student borrower. The average student borrower graduates with nearly $20,000 in debt.

Harvard students may be better insulated against the changes in federal policy by the university’s ample resources.

“If the federal program were to be cut substantially and if they were to become less attractive, Harvard students in general have access to a great deal more need-based funding than nationwide,” Donahue said.

The median educational debt for the graduates of the Class of 2004 who took out loans was approximately $8,000. According to Donahue, about 1,500 Harvard undergraduates use federal loans to help finance their education.

Last year, Harvard students borrowed $3.5 million through federal programs, of which $2.1 million was through Perkins Loans rather than the direct lending that is the focus of the Education and Workforce Committee proposals.

Harvard students and their parents borrowed approximately $13 million last year, of which $10.3 million was taken out in parent loans.

—Staff writer Samuel C. Scott can be reached at sscott@fas.harvard.edu.