Politicians like to quip about making college accessible. While keeping the actual cost of tuition affordable is a worthy goal, legislators should ensure that students enter higher education with a full understanding of their financial commitments.
No matter which educational policy Congress tackles, it should highlight a necessary provision: Lending rates should be fixed for the duration of student loans to provide borrowers the stability and protection needed for them to financially plan for a college degree.
On July 1, federal subsidized Stafford loan rates are set to double from 3.4 to 6.8 percent. To avert this hike, House Republicans passed a bill on May 23 that would reset rates every year based on market trends.
This move would save the government money and maintain the low rate for the time being, but the rate would likely rise as high as 7.7 percent in the next 10 years, according to the Congressional Budget Office.
In contrast, Senate Democrats want to maintain the subsidized rate at 3.4 percent for the next two years, theoretically paying for them by closing tax loopholes.
Finally, President Barack Obama, taking elements from both party ideologies, hopes to tie the interest rates to the market, and fix these rates for the life of the loans.
Of the three proposals, Obama’s plan strikes a balanced middle ground and provides students with the most stability. A total of 17,634 UCLA undergraduates have taken out more than $100 million in student loans this year, according to Monicke Freeman, a senior analyst at the UCLA Financial Aid Office.
For this reason, UCLA, let alone the entire University of California, has a large stake in these national policies.
Student loans in the U.S. passed the $1 trillion mark late last year. Of that $1 trillion, $110 billion are seriously delinquent, or 90 days past due.
Whether this level of delinquency is because of more unemployment or increased borrowing among students, unstable interest rates would invariably worsen this number. Maintaining a student’s initial interest rate would avoid sudden payment increases in the future, and thus lessen the chance of loan delinquency.
When prospective students decide to go to college, they should be able to anticipate the total cost. Variable interest rates would make this impossible, and as a result, would make college much less attractive and attainable.
The Congressional Budget Office projected that a market-based rate would rise to 5 percent by next year. If students took out a loan this year at 3.4 percent, they would likely not have foreseen, nor planned for, this sudden increase. A fixed rate would therefore allow for responsible financial planning on the part of the student.
Variable interest rates exist on some private loans or mortgage payments. But students are not average consumers in a market – they are government investments. As such, they deserve greater protection and consistency that will guard them against harsh market fluctuations.
“We need to move away from a system that allows Washington politicians to use student loan interest rates as bargaining chips, creating confusion and uncertainty for borrowers,” said John Kline, Republican chair of the committee responsible for the House legislation, in an address to Congress.
While Kline is right to criticize the shortsighted plan put forward by Senate Democrats for temporarily extending an arbitrary interest rate, he fails to acknowledge the new kind of uncertainty his party’s plan would create.
Politicians like to give lip service to students about making higher education affordable, but unless they create a plan that keeps some semblance of stability for student loan interest rates, any plan will only be a step backward.
Email Ferdman at mferdman@media.ucla.edu or tweet her at @MaiaFerdman. Send general comments to opinion@media.ucla.edu or tweet us @DBOpinion.