Memo to Democrats: Keep Your Eye on the Ball

When it comes to student aid, President Obama has made his wishes clear: he wants Congress to use the savings it derives from eliminating the Federal Family Education Loan (FFEL) program to make Pell Grants a true entitlement for low-income students. But as Democratic Congressional leaders take up legislation to enact the President’s plan, they are likely to have other ideas about how this money should be spent.

Some lawmakers will surely be tempted to take advantage of this opportunity and push for an extension of an interest rate reduction Congress approved in 2007 on subsidized federal student loans. Doing so would prevent a sudden rise in the student loan interest rate — from 3.4 to 6.8 percent — at the tail end of Obama’s first term, when the rate cut is set to expire.

At Higher Ed Watch, we recognize that allowing the rate reduction to expire in 2012 would be a politically risky move. Nonetheless, we would strongly urge Congressional leaders to stay faithful to Obama’s plan. The administration has handed them a once-in-a-lifetime opportunity to put the Pell Grant program on a firm financial footing by financing it entirely with mandatory funds. Diverting funds to pay for an interest rate cut could cripple this effort, without providing much of a public policy benefit.

A Central Campaign Plank

In 2006, Democrats made cutting the interest rates on student loans in half, from 6.8 to 3.4 percent, a central part of their campaign to wrest control of Congress. Party leaders believed that this pledge would have widespread appeal among middle-class families worried about ever-rising college prices.

Once in power, Democratic lawmakers moved quickly to try and make good on their promise. However, because of budget constraints they were forced to scale back their plan. Instead of reducing interest rates on all federal student loans, they limited it to only federally subsidized loans, which go to students with the most financial need. And instead of having the cut go into effect immediately, they phased it in over five years. (Students who take out new loans next fall, for example, will lock in a rate of 5.6 percent.)

In addition, because they included the measure on a budget reconciliation bill (the 2007 College Cost Reduction and Access Act), they were able to keep the reduction in place for only a limited time. As a result, just one cohort of federally subsidized student loans — those issued in 2011-12 — will actually carry a fixed interest rate of 3.4 percent over the life of the loans. After that, the rate cut expires and students will go back to paying a 6.8 percent fixed rate.

Little Bang for the Buck

It is certainly understandable why Democratic leaders would want to stop this increase from occurring, particularly at a time when President Obama is likely to be running for reelection. But we think it’s worth pointing out that student aid experts in the Obama administration are not pushing for the extension. They recognize that the costs of such a proposal (estimated to be several billion dollars a year) would outweigh its benefits, because it would do little to accomplish the main goal of federal student aid policy: reducing the college-going gap between low- and moderate-income students and their more-affluent peers.

While extending the rate cut would certainly reduce the debt burden of some borrowers, even that benefit would be limited as it would continue to apply to only federally subsidized loans. Those financially needy students who need to take out unsubsidized federal loans would still be stuck paying higher rates on them. In addition, extending the rate cut obviously wouldn’t do anything to help low- and middle-income students avoid having to take out high-cost private loans to help cover their college costs.

In contrast, President Obama’s plan would fundamentally restructure the Pell Grant program to make it a more reliable and predictable source of financing for needy students. It would also raise the maximum grant to $5,550 for the 2010-11 academic year and guarantee future yearly increases that exceed the rate of inflation. The administration estimates that under its proposal, the number of students who would benefit from the Pell Grant program would increase by nearly 1.5 million, or 24 percent, over the next two years. Meanwhile, the administration has also called for significantly expanding the Perkins Loan program expressly to help financially needy students avoid having to take out expensive private loans.

Democratic Congressional leaders have the chance to make some truly substantial changes in student aid policy that would greatly benefit students and their families. But they must keep their eye on the ball, and not get distracted by pushing other costly priorities, like an extension of the interest rate reduction, that would give them little bang for the buck.