Proposal would kill fixed-rate loan plan

Amy Horst

Market conditions might continue to determine student loan interest rates under a proposal to be introduced in the U.S. House of Representatives this week.

Currently, those who have student loans pay interest based on the market rates, as long as that rate does not exceed a certain amount. But this is set to change July 1, 2006, when borrowers will instead pay a fixed interest rate that does not respond to market fluctuations.

The House plan, backed by Republican leaders on the House Committee on Education and the Workforce, would stop the switch to a fixed rate and keep the current variable interest rate.

“Any type of a fixed interest rate is essentially an arbitrary number,” said Alexa Marrero, press secretary for the House Committee on Education and the Workforce. “Trying to predict rates now and into the future is like looking into a crystal ball, and a very foggy one.”

She said because the current market, students and other borrowers pay less in student loan interest than they would with the fixed rate.

“I think that variable rates make sure (students) aren’t locked out of low rates when the market can produce them,” Marrero said.

Critics of leaving the rate as is said the Republican plan would not work because the Congressional Budget Office has predicted a considerable increase in interest rates over the next decade, and that could cost thousands of dollars to people paying off student loans.

But no matter what happens, somebody will have to pick up the cost of educating students, said Kris Wright, director of the Office of Student Finance.

“The problem is that it pits a bunch of different groups against each other,” Wright said.

Wright said much of the problem with increasing interest rates can be attributed to the federal budget deficit.

“One thing that’s going to happen is that as the federal government continues to run deficits, inflation will start to pick up,” Wright said. “And with inflation picking up, interest rates will rise.”

She said although having a fixed interest rate might seem like a good idea because students are not penalized when interest rates increase, the federal government pays more to make up for the increased interest rates.

The government might then cut programs to make up for the money it loses, Wright said.

Barry Toiv, spokesman for the Association of American Universities, said if interest rates rise in the next few years, it might be good to have the fixed rate. But, he said, predicting what the economy will be like in 2006 is impossible.

He also said it is worth looking at a compromise plan that would keep interest rates variable but would lower the maximum amount of interest banks could charge borrowers.

However, he would like legislators to look into other ways of making higher education more affordable, including increasing Pell Grants.

If the change from variable to fixed rate loans occurs, it will affect loans made on or after July 1, 2006.