Common sense on loans

While the Senate missed a July 1 deadline to prevent interest rates on certain student loans from doubling to 6.8 percent, it continues to negotiate a solution. But it shouldn’t compromise by incorporating the House of Representatives’ proposed market-based approach to setting rates.

The House-passed bill would peg interest rates at 2.5 percent above a variable rate, determined each year by the yield on 10-year Treasury notes. The Congressional Budget Office estimates those rates would rise to 7.7 percent within the next 10 years.

President Barack Obama also has suggested pegging interest rates to a 10-year Treasury note but having them fixed, not variable, for the term of the loan. He would cap payments at 10 percent of a borrower’s income.

One Senate proposal, backed by Tennessee Republican Lamar Alexander and others, would set interest rates at the Treasury note rate plus 1.85 percent. Perhaps the best of the Senate proposals, by New York Democrat Kirsten Gillibrand, would set interest rates at 4 percent (and would permit students and graduates with debt at a higher interest rate to refinance at that rate).

A Senate proposal that failed to pass a procedural vote this week would simply have extended the 3.4 percent rate for the 7 million students with subsidized Stafford loans for another year.

What’s lacking in all of these proposals are the common-sense solutions recommended by credit counselors and consumer advocates. That would include: increased funding for outright grants to talented students; loan forgiveness after a period of years; permitting student loan debt to be discharged in bankruptcy; limiting or ending lending to students with mediocre high school records who are unlikely to graduate; and making students from upper middleincome and affluent households ineligible.