Merriam-Webster defines a crisis as: “A crucial or decisive point or situation; a turning point, or an unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change.”
Washington, D.C. loves a crisis. There’s nothing like impending doom to effectively showcase your power. In a full-blown crisis, a legislator can imagine themselves as a “leader,” valiantly riding to the rescue of the oppressed.
But the nation isn’t always in a state of turmoil. So what does Congress do when they need a crisis? They invent one. The latest is the “student loan crisis.” This crisis had been solved. But this week, Senate Majority Leader Harry Reid stepped in and reignited the drama by blocking the carefully negotiated bipartisan solution.
It all started with the budget crisis, of which the student loan crisis is really a derivative. Everyone but Congress has realized the United States is broke and on the verge of financial collapse. In Congress though, they’ll keep pretending to have money until the plebeians below them are actually starving.
On July 1, rates of interest on federally subsidized Stafford student loans are going from 3.4% to 6.8%. This rate change would wallop an estimated seven million college students. College educations are already prohibitively expensive, and this change will make them even more costly.
In the face of this looming debacle, a bipartisan group of senators, led by West Virginia’s Joe Manchin, agreed on a program that would connect rates of interest on fresh loans to market interest rates. The deal would stave off the high-priced rate hike. The long-term consequences of the deal would be higher rates in future years.
The Manchin plan is similar to a plan introduced by President Obama. With the Manchin plan, interest rates would be based on the 10-year Treasury note, plus an additional amount.
For example, the loans taken this fall would translate into undergraduates paying 3.6% interest, graduate students paying 5.2% and parents paying 6.2%. In the future years, rates would float. Undergraduates currently pay 3.4% interest. Undergraduates who have unsubsidized Stafford loans pay 6.8%. Graduate students and parents pay back the government at 7.9% under the current system.
Obama’s plan proposed fixed rates, but it did not propose caps. Fixed rates means students would always pay the same interest, but that rate could be really high. The Obama plan would limit loan debt repayments to 10% of a borrower’s income, and would retire all student loan debt after a borrower has made payments for 20 years.
With the July 1 date right around the corner, why would Reid choose to kill the Manchin plan, which would currently alleviate the problem? Only Harry Reid knows the answer for sure, but I‘ll venture to guess that he wants to make political points by precipitating a disaster. Then he can ride to the rescue. As he rides to the rescue, we can all be amazed at his importance and brilliance.
Although the crisis is coming to a head, its effects extend far beyond the college years. Student loan debt slows the economy, as college graduates who are scrambling to pay off their loans, are frequently unable to buy cars, buy homes, or otherwise build a successful life.
Just like with the fiscal cliff crisis, this year’s higher student loan interest rates will really hurt a lot of people. The broken process guarantees that the millions of Americans due to pay the higher rates are dreading the hikes and feeling powerless…And powerless is just where Congress wants them.
This commentary originally appeared on Capital Hill Daily.com, and is reprinted here with permission.
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