Why the Student Loan Problem Is Hard to Fix

PHOTO: US President Barack Obama speaks on students loans on May 31, 2013 in the Rose Garden of the White House in Washington, DC.

Mandel Ngan/AFP/Getty Images

Mom and Dad are fighting again about what's best for the family and the kids are about to get hurt.

That basically sums up the current student loan mess in Washington, D.C.

Interest rates on new subsidized Stafford loans, available to financially needy undergraduate students, are set to double from 3.4 percent to 6.8 percent on July 1. Interest rates on current loans will stay the same, but students who take out new loans will be impacted.

About seven million people stand to get hit.

Republicans, Democrats and the White House all agree that's a bad thing.

So why is there a very real possibility that it might still happen?

Because while lawmakers say they want to help students, they can't agree on how to do it and are taking every opportunity to place blame elsewhere.

Details of the different proposals being offered by varying factions are here.

Basically, some Democrats want to freeze the interest rate at 3.4 percent and pay for the difference by closing what they say are tax loopholes that benefit the wealthiest Americans. They say it's better to address the issue when Congress looks at the laws surrounding student loans set to expire later this year.

Speaker of the House John Boehner (R-Ohio) said it's Democrats who are picking a "fake fight" during his weekly press briefing on Thursday. He took the opportunity to tie the impasse to sluggish job growth.

Arguably related? Sure, but it's also a key Republican talking point and Boehner wasn't about to pass up a good opportunity to convince voters Democrats have got it all wrong.

Obama has countered that he's pushing back because the Republicans have a bad plan. The president said reforms should lock in interest rates for the life of each loan, which the Republican House plan doesn't do.

Obama says interest rates could skyrocket as the economy improves. And naturally he's taken the opportunity to drive home one of his own talking points, which is that Republicans are looking out for the wealthy and not everyday Americans.

The White House also sent Policy Advisor Roberto Rodriguez into the ring (via a Twitter chat, naturally) to call on Congress to act.

"If Dems and Repubs both don't want rates to double, what's the problem? #dreamsnotdebt #dontdoublemyrate," asked one reasonable young woman.

The response?

Simply "Congress should come together on a bill that keeps rates low and doesn't ask students to fund deficit reduction."

Really heavy on the specifics there, White House.

If this was a boxing match we'd be in a neckbrace with all the back and forth punches, right?

Let's bring in the level-headed, nonpartisan Congressional Budget Office for a minute.

If the rate is kept at 3.4 percent, the CBO says, it would "increase the cost of the student loan program to the government by $41 billion between 2013 and 2023."

Obama says that could be countered by closing tax loopholes that benefit the rich. The GOP says keeping the rate the same would simply be piling up more debt to pay for a continued rate freeze.

So what if a miracle occurs and Congress actually agrees to a proposal making the rounds on Capitol Hill?

It's hard to say because they're each different.

The CBO says that if rates fluctuate based on the yield on 10-year Treasury bonds (which both Republicans and Obama have proposed in varying form and with various ramifications), it would allow the government to have a better idea of what they're going to shell out year to year. The red flag the CBO raises is that if the economy takes off and interest rates on Treasury bonds go up, students could be faced with skyrocketing rates unless there's a cap put in place.

So what if nothing happens (this is looking increasingly likely) and rates are allowed to double on July 1?

The government will make money initially, but the amount will taper over time from about $37 billion in 2013 to below $10 billion by 2018.

That's because the rates the government pays on Treasury securities will continue to rise while interest rates on student loans stay constant.

The Obama administration says that would cost students about $1000 each.

The CBO cautions that allowing rates to rise could prompt students to decide not to go to school or to drop out early. That could lead to lower earnings and hurt the economy.

And it could have long-lasting impacts. People would have to devote more future income to paying off the loans, which could delay things like purchasing homes or saving for retirement.

So will the world end if rates go up?

No, but there are some real consequences. And at the moment, lawmakers seem to be better at picking fights for their own benefit than at focusing on what's best for their constituents, namely students and the parents and others who support them.

That makes getting anything done tricky, especially when there's a hard deadline like July 1 looming.

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Political Dysfunction

Student Loan Borrowers Mean Big Money for the Government

Here’s a bit of background: Last summer, the government passed a student loan law that tied interest rates to interest on 10-year Treasury notes, essentially what it costs the government to borrow money.