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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.

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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.

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