House to Vote on Halving Student-Loan Interest Rate

The U.S. House of Representatives is scheduled to vote tomorrow (Jan. 17) on legislation that would, over the next five years, cut in half fixed interest rates on subsidized Stafford loans, but only for undergraduate students. The legislation would reduce, in annual increments, the current fixed interest rate of 6.8 percent on those loans, to a rate of 3.4 percent beginning July 1, 2011. The interest-rate cut would apply only to new loans.

In introducing the College Student Relief Act of 2007, Rep. George Miller, D-Calif., chairman of the House Committee on Education and Labor, said, “This legislation will be a vital first step towards helping lower college costs for millions of low- and middle-income students, while keeping our promises to taxpayers to maintain responsible spending.”

While calling the proposal “admirable in purpose,” Rep. Howard “Buck” McKeon, R-Calif., the ranking Republican on the committee, said the bill addresses neither of the priorities of making college more affordable or more accessible for low- and middle-income students. McKeon noted that the bill “provides benefits to those who are no longer even students.”

To cover the federal cost of the interest-rate reduction, the legislation proposes billions of dollars in cuts to organizations that provide services to schools, students and parents, and taxpayers under the Federal Family Education Loan Program, the largest federal student-aid program. Those proposed cuts include:

• Reducing lender insurance rates in the event of default to 95 percent from the current rate of 99 percent for “exceptional-performer” lenders and 97 percent for non-exceptional performers.
• Reducing the percentage of direct collections from defaulted borrowers that student-loan guarantors may retain from the current 23 percent to 20 percent beginning Oct. 1, and to 18 percent beginning Oct. 1, 2008. According to the bill, beginning Oct. 1, 2010, guarantor retention on default collections would be equal to the average rate paid to collection agencies that contract with the U.S. Department of Education.
• Eliminating the “exceptional performer” status for lenders.
• Reducing lender special allowance on loans disbursed beginning July 1, 2007, by 0.1-percentage point. The smallest education lenders, those accounting for a combined 10 percent of student-loan volume, would be exempt from the change.
• Increasing the origination fee on lenders to 1 percent from the current 0.5 percent beginning July 1.
• Increasing the annual consolidation-loan-rebate fee to 1.3 percent for lenders whose student-loan portfolios consist of 90 percent or more of consolidation loans.

The proposed cuts come on top of an estimated $20 billion in gross cuts imposed on the FFELP as part of the Higher Education Reconciliation Act of 2006. “These budget cuts, when coupled with those made last year, risk the ability of lenders to invest in technology, enhance customer service and offer benefits to borrowers,” said Joe Belew, president, Consumer Bankers Association, which represents some of the largest FFELP lenders.