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Cutting Student Loan Rates: Good Or Bad Idea?

The new Democratically controlled U.S. Congress is in the middle of its 100-hour agenda, and one hot item up for legislation today is a House proposal to cut student loan interest rates in half – to 3.4% - over the next five years. The proposal is likely to pass easily but some critics say the plan does nothing to make college more affordable to low and middle-income students. Luke Swarthout, of the U.S. Public Interest Research Group, and Brian Riedl, of the Heritage Foundation, debated the hot-button issue on “Morning Call.”

Student load interest rates are currently at 6.12%. The proposed bill would incrementally lower the rate until 2012, where it would remain at 3.4%. Swarthout argues that the policy will save low and middle-income borrowers thousands of dollars over their borrowing careers and it is a good start in helping to make college more affordable to everyone. Riedl countered that “this bill will not help one student borrow one more dollar for college,” because students don’t start paying interest until after they graduate.

Riedl’s argument is that it should hardly be the burden of the federal government to help college graduates - whose lifetime income is already increased by $1 million on average just by graduating – save relatively small amounts of money in interest rates. In addition, he says, since the proposal doesn’t raise the borrowing limit, it actually doesn’t help students qualify for any new loans or grants.

The average college student graduates with a debt of $17,500, which Riedl says may seem like a lot of money but only comes to about $100 per month in interest. Swarthout says that for recent graduates to be paying over 6% on their loans is simply too heavy a burden for them to bear at such a critical time in their lives – as they balance the need for healthcare with working their first jobs, moving out and eventually starting families.

Critics have also said the taxpayer money funding this proposal could more effectively be used to increase Federal Pell Grants, which, unlike loans, do not have to be paid back. Swarthout agrees that Congress should also do more to increase Pell funding but says the House Democrats’ rate cut proposal is a very positive first step in helping recent college graduates lift a financial load that can hamper them in as they transition from college into the “real world.”