On July 1st, interest rates on new student loans will double unless Congress resolves to act. In 2007, then-President George W. Bush signed into law the College Cost Reduction and Access Act which, among other things, gradually reduced interest rates on undergraduate federally subsidized loans from 6.8 percent to 3.4 percent. This reduction applies to loans originated between July 1, 2008, and June 30, 2012, and was part of a broader effort to attract young voters going into the 2008 election. Facing another election year, neither Republicans nor Democrats want to be blamed for failing to extend the reduced interest rate.
According to the White House, without an extension, approximately 7.4 million undergraduates will be required to pay on average an additional $1,000 annually over the life of their loans. The extension is not without cost and requires $5.9 billion in off-sets if the provision is to be paid for in full.
The GOP-led House passed a one-year extension that is fully paid for through the elimination of a prevention and public health fund authorized by the 2010 health care reform law. The Senate intends to consider the matter although not using the House version. Its version would be paid for through the imposition of stricter tax rules on certain S corporations. In the interim, President Obama and several members of his Administration have been fanning out across the country to discuss the issue.
Some question the overall benefit of the reduced interest rate; it does nothing to address one of the critical factors that make repayment of student debt so difficult - the inability of new graduates to find gainful employment. It is likely that an extension of the interest rate reduction will pass in time for each side to claim political credit. The more serious question of unemployment among college graduates will require solutions that are not yet on the table.