Smarter Solutions for Students Act

Floor Speech

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Mr. REED. Madam President, I am pleased to offer this amendment, along with Senator Warren and 18 of our colleagues. Our amendment would provide the kind of certainty students deserve and that they will not receive under the proposed bipartisan Student Loan Certainty Act as it is currently drafted.

Simply put, our amendment will ensure that students and parents will not be any worse off than they would be under the current fixed rates of 6.8 percent or 7.9 percent. To illustrate this, let me present a chart.

Under the underlying legislation, Stafford loans for students are essentially subject to the same interest rates, and they are depicted here. These are the undergraduate loans in yellow and the graduate loans in white. We can see in the first year for the undergraduate loans it is just under 4 percent, and that is less than the 6.8-percent current statutory limit. For the graduate loans, they are up roughly about 5 1/2 percent, which, again, is below that. But very quickly, by 2015, the graduate loans exceed this 6.8-percent threshold. That is the current law. Then it keeps going up and up and up.

Actually, this chart does not represent the entire impact because the last bar represents the estimates not just for 1 year but for 5 years. So we can see these increments--the white increments for the graduate loans--keep going up and up and up indefinitely. This is permanent legislation. This is not a 5-year fix or a 10-year fix. It is permanent legislation. A similar process is that the undergraduate Stafford loans go up and up and up and up.

Our legislation will simply say if you want to provide an incentive and a benefit for students who are today going to school, that is commendable, but at some point we are going to have a much worse deal for students than we have just with the current law. So we are proposing, very simply, to cap at 6.8 percent the Stafford loans and then at 7.9 percent for the parent PLUS loans.

This is a projection of the percentage interest rates for parent loans. Again, 2013, it is below the present 7.9-percent statutory limit, but quickly, by 2015, it is above, and then it is indefinite. From 2018 to 2023 and beyond, it goes up and up and up and up. Our amendment simply says if we want to give everybody a benefit in the next several years of lower rates, do it, but let us give real certainty that rates will not exceed the current statutory rates.

As I have indicated previously in my remarks, I wish to commend the authors at least for putting in caps on rates.

Some of the original proposals coming from the Senate Republicans and other places had no real caps in place. At least now we have caps.

I want to particularly thank Chairman Harkin, because he committed himself to ensuring that all these loan programs have a cap. Our point, though, is the caps are so large that effectively students and parents in a very short period of time will be paying much more than they are today. These caps are too high. They could go as high as 8.25 percent for undergraduate Stafford loans, 9.5 percent for graduate Stafford loans, and 10.5 percent for PLUS loans. Those are significantly higher than our threshold. We can do better. We want to protect students from these high interest rates.

In Rhode Island, roughly 49,000 students will borrow for this coming academic year. They would benefit from this approach, but their brothers and sisters, who may be freshmen in high school, will be taking out loans when the interest rates will be exceeding the current rates.

Adopting the Reed-Warren amendment means students can benefit from these low rates initially, but then we will have the existing statutory cap in place for future generations. As it exists now, if you are a senior in high school and you are going to college next year, you are going to get the benefit of the rate, but your younger brother or sister, who may be a freshman or junior in high school, and your parents are paying for it in the future, and will be paying indefinitely.

As my colleague Senator Warren has pointed out, they are doing it in a situation in which the government is making billions of dollars a year on these loans. This is not a question of putting subsidies in. Contrary to the history and purpose of the student loan programs, we are actually reversing the subsidy. We are saying, No, the students pay.

Education is so important to the future of America, yet we are no longer going to invest in it as a Nation. We are going to let students pay. That is the way this whole approach has been structured. They picked as their benchmark the 10-year Treasury bill. Typically, we use the 91-day Treasury bill. Just in the baseline, there is a higher interest rate. Then they picked a premium to put on top to compensate the government for potential risk of loss. As some of my colleagues suggested, we are not quite sure what the premium should be, and we feel very strongly that premium is much too high for the actual risks and costs of the program. So this proposal has baked in higher interest rates for some students after the first 2 years, and for all students and parents in the long run.

I believe what we are doing in the Reed-Warren amendment makes a great deal of sense. Many people are struggling in many different ways, and particularly students are struggling with student debt. We should ensure that the new rate structure does not leave students worse off--and not just for the first 2 years, but let's be realistic and serious. Let's look down the road. This road is taking us to higher and higher interest rates for students. I think we can do better. I think we must do better.

I would point out that we have paid for this amendment by putting a very small surcharge of 0.55 percent on incomes over $1 million, so this is fully paid for, and it will give students the real certainty that they will not see interest rates go beyond the present statutory limits.

I think what we should be doing as a Nation is not shifting the burden to students but investing through students in our future. We know if students are able to go on to college and to postgraduate education, they are going to make more money, they are going to contribute more to the economy, we are going to be more globally competitive, and we will be in a much better position.

Frankly, that was the wise judgment our parents and grandparents made when, in the 1950s, 1960s, and the 1970s, they decided to invest in the future of America by investing in higher education.

I daresay there are very few people in this Chamber who in one way or another did not directly benefit from that investment. But now we are saying today, No, it is on the students, they are going to pay market rate premiums, and, according to CBO numbers, we will be generating about $184 billion--the difference between our borrowing costs and what the students and families are paying. That is not the way to grow a strong, prosperous America.

Because there have been elaborate studies, we also understand that we have a jobs gap already between highly educated individuals and the jobs. By 2020, there will be about a 5-million-jobs gap between those jobs requiring higher education and the projected graduates in the next several years going forward.

So we have to do much more, and I think we also have to look at the issue in a comprehensive way. We have to build in incentives for lower costs at colleges and universities. That is not being done in this legislation, and I think once we pass it, the likelihood of getting on to that issue is diminished.

We also have to try to come up with ways in which students can refinance loans. A trillion dollars of student debt has surpassed credit card and automobile debt as the second biggest household debt in the country, and that is going to grow. It will particularly grow under the underlying proposal. We have to figure out a creative way to do that. And, by the way, that is going to cost money. So if one of the principles and premises of this whole legislation is we will spend no additional money for higher education support, how are we going to fix that issue of students and families who are deeply in debt--not just those who are carrying the debt today but those who are going to accumulate the debt going forward?

I urge my colleagues to vote yes on the Reed-Warren amendment. This will be the certainty that is proclaimed in the title of the underlying legislation.

Madam President, I yield the floor.

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Mr. REED. Mr. President, I recognize it is a much larger State. The nice thing about the Senate is that we all have two Senators.

There has been a great deal of work put together by so many people here: Senator Carper, Senator Manchin, Senator Alexander, Senator Harkin, Senator King, and Senator Burr. I could go on. They have been trying--in a principled way--to help students. They provided short-term help, but the major criticism I have of the legislation is that it locks us into the long-run, predictable rate increases and will add further to the burden that students and families are bearing to send their children, and themselves, to college and beyond.

Despite these great efforts, I just do not believe this approach, if unamended, is going to be the way we want to move forward.

Mark Kantrowitz is a well-known expert on student aid. His comments are particularly telling.

It's still going to be, effectively, an interest rate increase masquerading as a decrease. Students currently enrolled will benefit from the low interest rates, but as the economy recovers and rates rise, today's high school students could end up paying more than 6.8 percent. It's far from a permanent solution.

I think he is right. I wish to emphasize the fact that as the economy recovers and rates rise, one of the fallacies of the CBO projections is that back in early 2000s they suggested that interest rates would stay very high. They did not anticipate the collapse in 2008 and 2009 of our economy.

Honestly, I don't think we want to premise our student lending on an economic collapse. I think what we want to do is assume and hope that the economy recovers, which will invariably increase interest rates. We are starting at the low point of interest rates, and then inevitably we are moving up. We are moving up as the economy recovers. We will also move up as the Federal Reserve limits their very aggressive quantitative easing program, where they have been buying securities to depress the rates.

If we look at the CBO projections, parents and graduate students will begin paying more than the current fixed rate of 6.8 percent and 7.9 percent by 2015. That is not a long time. That means the young freshman who is going into college next year might benefit from this proposal, but the younger brother or sister who is a freshman in high school will be paying much more.

I think collectively, over time, since this is a permanent proposal, the debts that will accumulate to American families and American students will be significant.

We are essentially adopting a new approach to Federal policy on higher education. We are not subsidizing it; we are not making it below market rates. We are shifting the costs on to students. That is because one of the premises in this proposal, quite obviously, is that there will be no cost to the government, and we are starting with the principle of a rate of 6.8 percent over time. So as we decrease rates for the first few years, just simple arithmetic tells us we have to raise rates going forward.

Also, I think the way this is structured has to be considered. We have chosen not a short-term T-bill rate--a 91-day rate--which is low; we have chosen a 10-year rate which, in itself, is higher. So we have begun our reconstruction of the rate structure by picking a much higher baseline than has been consistent in the past, even with variable rates, and we have had variable rates in the past. Then we have added a premium to that to cover our costs--the cost of default, the cost of the administration of the program.

Interestingly enough, in this proposal, there is a study the GAO is ordered to do to tell us if our cost estimates are in any way close to the real cost to the Federal Government. I think the factor is significantly sufficient that the premium--the delta, if you will--we are charging students is much higher than the real cost, even including default rates, to the Federal Government.

I think this is a proposal that, again, was generated with great sincerity and great diligence, but over time it does not meet the test of consistency with our previous support for higher education. We actually subsidized higher education, and we did it at below-market rates. We did it because we believed we had to give students a chance to educate themselves not only for their benefit but, just as importantly, for the benefit of this Nation.

I would suggest--and around this Chamber I have said this before--directly or indirectly, every one of my colleagues who is of a certain age has benefited from subsidized student loans. If they didn't, then a brother or a sister or someone did. Yet we are saying that was good for us, but it is not good for this generation of students. They should bear the risk of interest rate increases.

They should bear the full cost. This is at a time when we have to be much more cognizant of the centrality of higher education in terms of the lifetime wages and earnings of individuals and in terms of our economic competitiveness across the globe.

We all have reached a point that unless we adopt the amendment I propose, we are locking ourselves into increasing rates that go way beyond the current statutory rate of 6.8 percent for Stafford loans and 7.9 percent for PLUS loans. Even with these rates--the current rates--6.8 and 7.9 percent--CBO has estimated that the government will generate about $184 million in revenues. That is the difference between the cost of funding and the return. It is just what it costs the government to borrow and what they are getting in revenue from students, accounting for defaults and borrower benefits. So instead of investing in students, we are basically profiting from them, and that point has been made by my colleagues, particularly Senator Warren, over time.

As we move to this new form of rate structure--10-year Treasury bills plus a premium; they are capped, but they are capped at high rates--the government will, in fact, be making even more money.

What I would like to do and what we have tried to do is to propose that we initially freeze rates at 3.4 percent and then spend the time to fix this problem as best we can completely. We need to develop a rate structure that does not provide a huge profit, as defined between the cost of funding and the revenue to the Federal Government, incentivize colleges to lower tuition--and that will be a very difficult and challenging endeavor--and think seriously about refinancing because right now we have students and families facing $1 trillion in debt, and they are suffering under this situation.

We want to take a comprehensive approach, but this is not the approach. This is simply fixing rates. The one certainty in this legislation is that the rates will go up--not right away, but they will go up--and they could go up very quickly, and they could reach the limits very quickly, and that is an additional burden on students. As a result, it will begin to make college more expensive, less affordable, less of an option for many families and youngsters, and it will hurt us in the long run in terms of our economic competitiveness and our ability to grow our economy.

We have had experience with market-based rates in the student loan program before. This is not new. Most recently, the market-based rates for student loans from July 1, 1998, and June 30, 2006, was yield on a 91-day Treasury bill plus 1.7 percent while the student was in school and plus 2.3 percent while the student was in repayment. This rate was capped at 8.25 percent, and it applied to all Stafford loans--subsidized, unsubsidized, and graduate. For parent PLUS loans, the rate was the yield on the 91-day Treasury bill plus 3.1 percent, capped at 9 percent.

Those rates were a good deal for borrowers. Students who are repaying their loans under this system have a rate of 2.35 percent this year and parents are paying 3.15 percent. That is because interest rates have come down dramatically. One of the reasons for that--perhaps the primary reason--is because we faced an economic potential catastrophe in 2008 and 2009. Economic activity shrunk, rates fell, and the Federal Reserve took a very aggressive program of quantitative easing to deliberately lower interest rates.

Instead of using the 91-day Treasury bill, what this underlying proposal uses is the 10-year Treasury bill. This decision results in a rate that in and of itself is 1.76 percentage points higher for this year alone. If we use the 91-day T-bill rate, we could lower rates even further, but we are using the 10-year rate, so we are already building in almost 2 percentage points of interest for students who will be subject to this legislation.

Since May 1 we have already seen the rates on the 10-year Treasury bill climb nearly 1 percent. Those rates are headed upward, and the CBO has projected them to rise. That is consistent, by the way, with an economic recovery. So the good news is if the economy recovers, interest rates will rise except it is not good news for students because their interest payments will rise. If CBO is wrong, that means we will probably have an economic shock ahead of us which will be bad news for everyone.

So I think we have to be very cognizant of the fact that there is a much better way to do this, and there should be a comprehensive approach.

What we are suggesting, and in the amendment Senator Warren and I are proposing, is that we at least cap the interest rates for the Stafford loans--for the undergraduate loans--at 6.8 percent, which is the current rate, and for the PLUS loans at 7.9 percent so no one, regardless of whether one starts college next fall or 4 years from now, will be worse off than the current situation with the fixed interest rate. I think that would be an improvement. I think, if we don't adopt such an approach, then we are locking students and families into a very costly and predictably increasingly costly structure. We are not making any reforms with respect to the cost of college. We are not dealing with the issue of refinancing.

Honestly, I also think to say, well, if it gets really bad, if we really start hitting those caps--to say we will go back and fix it fundamentally ignores one of the principles that underlies this proposed legislation--that there be no further costs to the government. To fix the interest rate several years from now, when it is 8 percent, again, will cost a lot more than staying with the current 6.8 percent fixed rate and 7.9 percent fixed rate.

So for that reason, I will be opposing the underlying legislation unless we can make significant progress with respect to at least capping the rates at 6.8 percent and 7.9 percent.

With that, I reserve the remainder of my time, and I yield the floor.

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Mr. REED. The Reed-Warren amendment would provide students and families with certainty by ensuring that interest rates will go no higher than they would under the current fixed rates in present law--6.8 percent for student loans and 7.9 percent for PLUS loans. The amendment is fully paid for by a very small--about one-half of 1 percent--surcharge on income over $1 million.

We should do this for students all across the country, and we should do it not only for the students who might be going to college next year but for those who are in high school today and will face, as we know, predictably higher rates.

A young man from Rhode Island wrote a letter to me. He said:

My brother, who is in college, will be paying a lot of money for college and he's worried he will have a hard time paying the loan. I'm afraid that by the time I go to college, loans will be so expensive that I will not be able to pay it off. My parents help with paying for college but they might not be able to help with a loan that big. I really want to be able to go to college.

For those young men and women who are in high school today or who are going to high school, we have to at least vote for this Reed-Warren amendment to make sure interest rates stay at least within the present bounds.

With that, I urge a ``yes'' vote.

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Mr. REED. Mr. President, I oppose the proposed amendment. It is short-term rate relief, but it is long-term rate pain for thousands of students and families across the country. We can do much better than that. In a few moments, we will have an opportunity after the voice vote to have another small discussion prior to final passage.

Again, I believe this amendment is not--despite the best work and best intentions and great effort by my colleagues--the best work we can do with respect to students and families.

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Mr. REED. Mr. President, as I indicated previously with respect to the amendment proposed by Senator Manchin, this proposal will provide short-term rate relief but lock in long-term rate pain for thousands of families and students across the country. It also represents the fundamental shift in our approach to student lending. It goes from investing in students and in our future economy to making those students be profit centers for the Federal Government. There is an estimated $184 billion over 10 years of profit in the current baseline. It is the difference between the cost of funding and the revenue paid by the students to the Federal Government. This proposal adds $715 million to that.

Also, we have done nothing to address the $1 trillion of outstanding debt that students face today. This measure will add to that debt.

Education has always been the engine of opportunity in this country. With this legislation, that engine will leave the station with many fewer students aboard.

I urge a ``no'' vote.

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