You can now read 5 articles in a month for free on BostonGlobe.com. Read as much as you want anywhere and anytime for just 99¢.

editorial

New student-loan formula could end annual dance in Congress

Unless Congress intervenes, interest rates on new government-subsidized Stafford Loans will double on July 1, leaving low-income students to foot an extra charge of roughly $1,000. Republicans, congressional Democrats, and the Obama administration have competing proposals to head off the hike. A bipartisan deal to find a market-based fix would be preferable to what happened last June, when the decision was simply pushed off by a year.

The best answer may require some give-and-take. The first priority should go to taking control of rates out of the hands of Congress. Pegging interest to a market rate — for instance, the 10-year Treasury note, as President Obama and House Republicans have proposed — would prevent what has become a frustrating annual standoff.

Continue reading below

Under the House-passed bill, the rate of each student loan could rise or fall over time, as the 10-year Treasury rate fluctuated. Under Obama’s proposal, the going rate for new loans would vary, but an individual borrower could lock in a rate for the life of the loan. More certainty about rates would help borrowers make life decisions, such as buying a home or getting married. But the GOP plan has an advantage: It caps rates at 8.5 percent, while Obama’s has no cap.

A third bill, backed by Democrats including Massachusetts Representative John Tierney, would reset rates annually to the 3-month Treasury bill — considerably lower than the 10-year note — plus a percentage, estimated to be about 2 percent, to cover the government’s costs. That would keep rates lower than the House version — the government subsidy effectively would be higher — but ultimately wouldn’t do enough to reduce volatility.

In practice, the government actually profits from its subsidized-loan plans. Senator Elizabeth Warren has rightly questioned whether it’s fair for the government to make some $50 billion from student borrowers. Her proposal to set the rate at 0.75 percent for one year, to imitate a rate that the Federal Reserve charges banks for emergency loans, raises a provocative question: Does the government care more about banks or students? But as a policy prescription, it mixes apples and oranges: Students aren’t banks, and the Education Department isn’t the Federal Reserve.

Ideally, a compromise would provide for a rate that is pegged to the market but has an upper limit, and give students an option to lock in a low rate. Instinctively, most Democrats would be just as happy for Congress to simply write a fixed rate into law. Many prefer yet another Senate bill to keep the interest rate fixed at 3.4 percent for at least two more years. Yet that would cost over $8 billion, while once again leaving families in limbo.

Students need more certainty. Only a market-based rate will provide that assurance — and a long-term solution to a complex debate.

Loading comments...
Subscriber Log In

We hope you've enjoyed your 5 free articles'

Stay informed with unlimited access to Boston’s trusted news source.

  • High-quality journalism from the region’s largest newsroom
  • Convenient access across all of your devices
  • Today’s Headlines daily newsletter
  • Subscriber-only access to exclusive offers, events, contests, eBooks, and more
  • Less than 25¢ a week
Marketing image of BostonGlobe.com
Marketing image of BostonGlobe.com
Already a subscriber?
Your city. Your stories. Your Globe.
Yours FREE for two weeks.
Enjoy free unlimited access to Globe.com for the next two weeks.
Limited time only - No credit card required!
BostonGlobe.com complimentary digital access has been provided to you, without a subscription, for free starting today and ending in 14 days. After the free trial period, your free BostonGlobe.com digital access will stop immediately unless you sign up for BostonGlobe.com digital subscription. Current print and digital subscribers are not eligible for the free trial.
Thanks & Welcome to Globe.com
You now have unlimited access for the next two weeks.
BostonGlobe.com complimentary digital access has been provided to you, without a subscription, for free starting today and ending in 14 days. After the free trial period, your free BostonGlobe.com digital access will stop immediately unless you sign up for BostonGlobe.com digital subscription. Current print and digital subscribers are not eligible for the free trial.