New Bill Would Link Student Loan Interest Rates to Treasury Note Rates

Last night, Senators Tom Coburn (R-OK) and Richard Burr (R-NC) introduced the Comprehensive Student Loan Protection Act, S. 3266.  The bill draws from a proposal Ed Money Watch’s Jason Delisle issued last month.  It would set fixed student loan interest rates – for all federal student loans – that are linked to the borrowing rates on 10-year U.S. Treasury notes.

Congress has been locked in debate over a one-year extension of the 3.4 percent interest rate available for newly-issued Subsidized Stafford student loans.  Legislators are divided on how to offset the $6 billion price tag.  Delisle’s solution and the Coburn-Burr legislation, though, are cost-free.

The idea works like this: Congress would link the interest rates on all newly-issued federal student loans, including Subsidized and Unsubsidized Stafford and Graduate and Parent PLUS loans, to interest rates on 10-year U.S. Treasury notes plus 3.0 percentage points (or 4.1 percentage points in the case of PLUS loans to maintain the premium the program has historically charged) . That means loans issued today would carry a 4.8 percent interest rate (based on the 10-year Treasury borrowing rate on the last day in May), well below the current 6.8 percent rate set for next year. 

That rate would be available for all newly-issued loans made to graduate and undergraduate students. In contrast, other proposals in Congress apply only to those undergraduates who receive a small subset of federal student loans – Subsidized Stafford loans. Because interest rates could eventually be higher than 6.8 percent, the Congressional Budget Office estimates the plan would lower the cost of the loan program in the long term by $52 billion.

Read Delisle’s piece in Inside Higher Ed today to see why the plan produces a better deal for undergraduate borrowers than under the proposed extension of the 3.4 percent interest rate.  

The Coburn-Burr bill – Delisle’s proposal – might be the best possible scenario for both borrowers and taxpayers. Students leave school with less debt than they would otherwise have, taxpayers save on the cost of the program, and lawmakers could skip further political infighting to pass a real policy solution.