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Michelle Singletary/The Color
of Money
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 federal consolidated
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.
It wants legislation that would prevent borrowers from consolidating
their loans to a fixed rate, as they can now.
On the other side are consumer advocates. They
say borrowers could pay nearly twice as much interest with a variable
consolidation rate.
Interest rates on federally based student loans
are generally variable at first. But when borrowers consolidate,
they are allowed to bundle their various loans into one fixed-rate
loan with 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 also benefit from the low rate, currently
3.4 percent.
For obvious reasons, millions of borrowers have
been rushing to consolidate. But there is a problem with all this
consolidation at low rates: It could cost the federal government
billions of dollars.
That's because as interest rates rise, the government
has to pay a subsidy to 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 switched to 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,''
said Rube, who believes that Sallie Mae is protecting its profit
margins rather than the interest of the federal treasury.
But Sallie Mae officials have voiced concern that
the potential increase in subsidy payments would 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 at Sallie Mae.
Look at the facts, said Joyce, insisting that I
read a recent report he believes 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. Its coauthors are 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 would 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?
After all, it's not as if these people stop needing
help once they leave school. According to a survey released last
year by the Cambridge Consumer Credit Index, 68 percent of those
polled said their outstanding student loans had prevented them
from purchasing 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 Democrat on the House Education 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 due to 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.
Says Sallie Mae, 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 if the interest subsidies
are just government gravy to lenders?
Michelle Singletary is a columnist with The
Washington Post. Write to her c/o The Washington Post, 1150 15th
St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com.
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