A BATTLE OF PERCENTAGE POINTS.

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Author: Friel, Brian bfriel@nationaljournal.com

EDUCATION

Mandy Plucker's mailbox has been filled this month with offers to consolidate her student loans. "Consolidate now!" a typical solicitation urges student-loan borrowers like Plucker. "Lock in the lowest student-loan interest rates in history."

Plucker has amassed a pile of loans to finance her undergraduate and graduate degrees from Dakota State University and South Dakota State University. After she finishes one more year of graduate work, she plans to work in South Dakota as a school counselor, probably at a starting annual salary of $24,000. As things stand, Plucker expects to pay $200 a month toward student loans. If she doesn't consolidate her loans before July 1, she figures her monthly payments could go as high as $400. "I also need to be able to feed myself and clothe myself," Plucker said.

Plucker is among thousands of student-loan holders faced with a financial decision this month that could save them thousands of dollars. Student-loan interest rates, which are recalculated each summer based on Treasury rates, have never been lower than now. But in July, the student-loan interest rates are going up nearly 2 percentage points, the largest annual increase since 1981. The most common type of loan, for example, has a 3.37 percent interest rate for borrowers in repayment, but the rate will go up to 5.3 percent on July 1. Under standard rules, students pay back their loans at the variable rate as it changes each year. But students are also allowed to consolidate their loans and lock in fixed interest rates at the current levels. If students consolidate their loans before the end of this month, they will lock in the lowest rates in U.S. history--rates that are unlikely to return soon, according to industry experts. A borrower with $19,000 in loans could save $2,100 over the 10-year life of the loan. "If you would like to save thousands of dollars, the time is now," said Kate Rube, an advocate for the State Public Interest Research Groups' Higher Education Project. After July 1, it will be too late.

The interest-rate hike comes at a politically potent moment on Capitol Hill. Congress is in the middle of a protracted reauthorization of the 1998 Higher Education Act, which is bogged down by numerous policy disagreements over the student-loan program. No fewer than four proposals for dealing with the seemingly arcane question of fixed versus variable rates for consolidation loans are circulating in the House. As student-loan borrowers scramble to lock in low fixed interest rates, lawmakers are battling over whether fixed interest rates should be allowed in the future--and jockeying for position as the lead defenders of students, protectors of the federal budget, or both. The outcome in this debate could affect billions of dollars in government costs and borrower payments.

Since 2001, when they stood above 8 percent, student-loan interest rates for borrowers in repayment fell each year, from 5.99 percent in 2002 to 4.06 in 2003, 3.42 in 2004, and 3.37 in 2005. Two years ago, in the midst of the falling rates, Congress began considering proposals for the reauthorization of the federal Higher Education Act, which governs loans and other types of federal assistance to college students. House Education and the Workforce Committee Chairman John Boehner, R-Ohio, the leader of the reauthorization effort, committed to writing a budget-neutral reauthorization, meaning no overall spending increases. Increases in one area of the higher-education budget would have to come from elsewhere in that same budget.

One proposal for saving money that garnered Boehner's support was a plan to end fixed-rate consolidation loans. Under the proposal, students who consolidated their loans would have to make payments at the variable interest rate as it changes each year, just as they do if they don't consolidate their loans. The change would save billions of dollars that could be used to benefit students currently in school, rather than for borrowers who have already left college and started working, supporters said. For example, Boehner wants to reduce typical origination fees on loans from 3 percent to 1 percent of the value of the loan.

The Coalition for Better Student Loans, a group representing some major lenders, financial aid administrators, and parents, pushed the elimination of fixed-rate consolidation, saying that consolidation was designed to simplify repayment for students by combining all their loans into one bill, rather than as a refinancing mechanism. In addition, some lenders have lost business to other lenders that have offered attractive consolidation offers to borrowers. Lenders in the former group support the limit to variable interest-rate consolidation, while lenders that have gained business support fixed-rate consolidation.

Several student groups, including the Public Interest Research Group and the U.S. Student Association, also support fixed-rate consolidation. It has been a very popular option among students since interest rates started falling. In March and April of this year alone, borrowers consolidated more than $8 billion in loans. "Fixed-rate student-loan consolidation is one of the most important benefits" for students, said Jasmine Harris, legislative director for the U.S. Student Association.

Rep. George Miller, D-Calif., the ranking member of the Education panel, has sided with those groups. Miller will soon introduce a bill that gives students the option of consolidating their loans at either a fixed or a variable rate. Miller appeared at a press conference with the groups on June 7 to announce his plan. "President Bush and the Republican leadership plan to make several changes to the student-loan programs--including eliminating altogether the option for students to lock in a low fixed rate on their college loans--that will force higher prices onto students and parents," Miller said.

But some Democrats view the fixed-rate consolidation option as too generous. Rep. Robert Andrews, D-N.J., a member of the Education panel with an independent streak, has been pushing a proposal to limit fixed-rate consolidation to low-income students. Thirty-one colleagues are co-sponsoring his plan, but student groups (who argue that the limits are unnecessary) and lenders (who say that the plan would be too complicated to implement) oppose it.

A fourth plan has been garnering more support as a compromise. Rep. Tom Petri, R-Wis., the similarly independent-minded vice chairman of the committee, is promoting a plan that would offer the choice of variable or fixed rates, but would tack on roughly 1 percentage point to current fixed-rate consolidations. A preliminary estimate of Petri's proposal puts savings at $28.9 billion over 10 years--satisfying the demand for savings in the higher-education budget while also preserving the fixed-rate consolidation option. The National Association of Graduate-Professional Students is supporting Petri's proposal as a potential compromise, as are some lenders. But other student groups oppose Petri's plan, because it would make fixed-rate loans more expensive for borrowers.

As chairman of the Education panel, Boehner has the greatest say in the debate. His staff points to a Congressional Research Service analysis showing that in 13 of the last 19 years, student borrowers would have been better off sticking to variable-rate consolidations rather than going with fixed-rate consolidations. Some borrowers, for example, locked in fixed rates in 2000, when the rate was above 8 percent. They missed out on the historically low rates of the past few years. (Such borrowers are urging Congress to allow them to reconsolidate their loans at the lower rates, a plan that Miller supports but others oppose as too expensive.) Fixed rates are unfair, committee spokeswoman Alexa Marrero said, because students who consolidate their loans in low interest-rate years get better deals than those who don't. Variable rates treat everyone the same, she said. Still, Boehner has signaled a willingness to consider Petri's plan. "Regarding the concept of a choice between fixed- and variable-rate consolidation loans, that is an idea that was actually raised during a committee hearing on consolidation loans held more than a year ago," Marrero said. "Chairman Boehner has always been clear that he'd be open to examining this or other ideas."

Mark Kantrowitz, a student financial aid expert and the publisher of FinAid.org, said that in the debate over fixed or variable rates, there is no right answer as to which method is better. "It depends a lot on what assumptions you make and what time period you look at," he said. For borrowers, variable rates are better for those who start paying back their loans in high-interest years, because they can take advantage of future interest-rate declines. Fixed rates are better for borrowers who lock in rates in low-interest years. But the fixed-rate loans are bad for the government's bottom line, because the government collects less money on direct loans that it administers and pays a higher subsidy to private lenders on loans that it guarantees. Because of the government subsidies, private lenders' bottom line is not affected, except if they lose or gain borrowers to other lenders.

The debate in the House could carry over into next year, when interest rates are expected to rise even higher. It will become more complicated then, because a provision in current law will change the key student-loan program to a fixed rate of 6.8 percent, instead of the current setup of variable rates up to a cap of 8.25 percent. That provision provokes much debate as well, since it would obviously have been bad for borrowers over the past few years, but may turn out to be good for borrowers as interest rates rise.

Still, John Dean, special counsel for the Consumer Bankers Association, said that the new, higher interest rates may defuse the debate, because fixed-rate consolidations will become less attractive and the difference between a variable or fixed rate will become less drastic. "It takes much of the drama out of that debate," Dean said. He added that the government will benefit from the higher rates because it will collect more money on student loans, while borrowers will lose out because they will be paying more--and will be more likely to default or seek forbearance on their loans. "The increase in rates is bad news for borrowers," Dean said. Unless they consolidate now.

REP. GEORGE miller: Plans to introduce a bill to give students the option of consolidating their loans at either a fixed or variable rate.

BASIC MATH: Student-loan borrowers stand to save a bundle if they lock in at low interest rates before July 1, when rates go up.

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By Brian Friel

The author can be reached at bfriel@nationaljournal.com