Dems divided over student loan rates

Senate Democrats are teeing up a battle with House Republicans over student loan rates but their efforts are being undercut by divisions within their own caucus.

The same political play worked well for the Democrats last year, when they forced Republicans to back down on the issue as the campaign season heated up.

Last summer, they were unified in the run-up to the election. Now they must contend both with the defection of party colleagues who cut a side deal with the GOP and with a proposal floated by President Obama that mirrors the policy Republicans favor.

Democratic senators are planning media appearances and a coordinated social media campaign with outside liberal groups over the July 4th recess to pressure Republicans on student loan rates. Those rates are set to double on Monday, from 3.4 percent to 6.8 percent.

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The Democrats in the Senate have scheduled a vote on July 10 on legislation that would freeze the lower rate for subsidized Stafford for one year and pay for it by raising taxes on certain inherited IRA and 401(k) retirement accounts.

Sen. Kay Hagan (N.C.), one of the Senate’s most vulnerable Democrats, is leading the messaging campaign.

On Thursday, she called the 3.4 percent rate freeze “critical for so many students and so many families in North Carolina and around the country”.

Hagan and Sen. Jack Reed (D-R.I.) are sponsors of the legislation.

But their strategy is undermined somewhat by three members of the conference who have cut a side deal to peg student interest rates to the fluctuating rate of 10-year Treasury notes.

Sen. Joe Manchin (D-W.Va.), one of the signatories to that bipartisan deal, suggested last week that his Democratic colleagues are being unreasonable.

“I hope that certain people start looking at truly compromising and working at something that fixes it,” Manchin said, when asked about opposition among Democratic colleagues to his proposal.

He said he could attract more Democratic supporters “if people are sincere about fixing things”.

Sen. Tom Carper (D-Del.) and Sen. Angus King (Maine), an independent who caucuses with Democrats, have also signed onto the deal with Republican Sens. Richard Burr (N.C.), Tom Coburn (Okla.) and Lamar Alexander (Tenn.).

The bipartisan group’s plan would set the rate for subsidized and unsubsidized Stafford loans at the 10-year Treasury rate plus 1.85 percent. Graduate Stafford loans would be set at 3.4 percent above the 10-year Treasury rate. PLUS loans for parents paying for their children’s education would be set at 4.4 percent above the Treasury-note rate.

In aggregate, the proposal would save taxpayers $1 billion over 10 years.

Unlike a proposal passed by the House, the bipartisan Senate plan would lock in the interest rate over the life of a loan. It would cap interest rates for consolidated loans at 8.25 percent.

Manchin described it as “along the same lines” as a plan included in Obama’s budget.

This has opened the door for Republicans to slam Democratic leaders for being unwilling to compromise on the rates issue.

“Despite the introduction of a bipartisan solution, the Democrat Senate leadership continues to block student loan reform by attacking the president’s plan,” Senate Republican Leader Mitch McConnell (Ky.) said in a statement.

Last year, faced with a unified Democratic front, Republicans agreed to freeze the rate for Stafford loans at 3.4 percent for one year, which expires Monday.

Obama spent weeks during the presidential campaign blasting Republicans for not agreeing to freeze student loan rates. This year, however, he has reached out to Republicans in search of a long-term compromise by proposing to set lending rates to the 10-year Treasury rates.

Obama has called for setting the rates for subsidized Stafford loans at 0.93 percent above the 10-year Treasury rate and the rate for unsubsidized loans at 2.93 percent above the bond rate. Like the bipartisan Senate plan, he has proposed locking in rates for the lifetime of loans.

Senior liberal Democrats have panned the bipartisan deal — and by implication, the president’s — by warning that Treasury rates could jump.

Indeed, financial markets were rocked in recent days by Federal Reserve Chairman Ben Bernanke’s signal that he would begin to taper the Fed’s bond buying program.

The yield on the 10-year Treasury note has jumped to 2.49 percent from just over 1.6 percent at the beginning of May.

Senior Democratic senators have ripped the Manchin-Burr plan for trying to “balance the budget on the backs of students”.

They warn that while rates for undergraduate Stafford loans would decline initially, they would jump to 7.1 percent by 2019.

“Every single loan program under the Manchin proposal will charge higher interest rates … than we have seen in the past,” said Sen. Tom Harkin (D-Iowa), chairman of the Senate Health, Education, Labor and Pension Committee. “We’ve heard from students who say, ‘No, this is not fair.’”

“Students across the country would rather have no deal than a bad deal,” said Reed, setting a tough tone for the debate.

Reid has also panned the Manchin-Burr proposal. He says it will not muster significant support within the Democratic caucus.