Congress Hopes to Raise Student Loan Interest

By Katherine Chow

Pivoting to his latest election-year theme, President Barack Obama will go before college crowds in three swing states to warn of financial doom for millions of students if Congress does not halt a looming spike in interest rates. 

Richard Toomey, dean of Financial Aid for Santa Clara, commented that the rate increase won't change the amount of money students are going to be able to borrow, but instead raise the overall amount they will have to pay in the long run. 

As for students at Santa Clara, Toomey also said, "since the raise in interest rates will affect only undergraduate students with subsidized loans (graduate students and all undergraduate unsubsidized loans are already at the higher rate), we expect about 1,650 students will be impacted, or roughly one-third of our undergraduate enrollment." 

Obama's clear political mission: rallying young voters whose support he needs again. His trip will take him to the University of North Carolina at Chapel Hill, the University of Colorado at Boulder and the University of Iowa. All three provide him potentially giant audiences in states he carried in 2008, and ones that are key to his re-election prospects against presumptive opponent Mitt Romney.

The issue is that interest rates are set to double on July 1, from 3.4 to 6.8 percent, on a popular federal loan for low- and middle-income undergraduates.

Congress voted in 2007 to drop the rate in half over four years. Now the looming expiration is an election-year issue. It was Obama's fellow Democrats in the House, however, who led the crafting of a law that left the rates to double in 2012. 

Republican President George W. Bush signed the deal into law after it was approved by bipartisan but Democratic-heavy majorities in both chambers.

For Obama, the matter gives him a platform to position himself as a defender of the middle class or those working to make their way into it. He is shifting from the issue of tax fairness, which he has hammered for weeks, to education in front of young voters who helped fuel his winning coalition in 2008.

The partisan flavor of the debate is all but sure to be on display at Obama's college events, which are likely to feel more like re-election rallies.

The White House insists Obama's events are driven by the need for college affordability and his view that education is an economic cornerstone. Education Secretary Arne Duncan said more than 7 million students would be financially squeezed if rates go up, to the cost of an additional $1,000 on average.

"More and more middle-class families are starting to think college might not be for them," Duncan said. "It's for rich folks. That's a real problem."

Another problem: the cost of keeping the interest rates frozen on these subsidized Stafford loans could run $6 billion a year. 

"For that to happen, there will need to be offsets in the federal budget elsewhere. If those offsets can be found without potentially placing the Pell Grant and other Title IV student aid programs under even greater stress then I would like to see the lowest interest rate feasible," said Toomey. "It is equally as important for the Federal Government to fully fund the Pell Grant program to help protect access and enhance affordability, as it is to supply low cost loans for higher education." 

It is unclear how that cost would be paid. Duncan said the administration will work with Congress on the answer.

For now, the White House is pushing a one-year extension, not a permanent fix.

The proposal faces a shaky future in Congress. Republican Rep. John Kline of Minnesota, chairman of the House Education and the Workforce Committee, "bad policy based on lofty campaign promises has put us in an untenable situation," said Kline."We must now choose between allowing interest rates to rise or piling billions of dollars on the backs of taxpayers."

Mark Kantrowitz, publisher of fastweb.com and finaid.org, said Obama wins politically on the issue even if Congress doesn't go along.

"If this is enacted, President Obama can claim a victory on a pocketbook issue that is of interest to a key voting demographic," he said. "If it's not enacted, he can blame the Republicans, his opponents, for doubling the interest rates." 

Contact Katherine Chow at Kchow@scu.edu or (408) 554 - 4849. Associated Press writer Ken Thomas and AP Deputy Director of Polling Jennifer Agiesta contributed to this report.