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Interest rates on government-subsidized student loans are set to double on July 1st unless Congress steps in. President Obama urged lawmakers to freeze rates at their current 3.4 percent. The president says this would help low- and moderate-income students save thousands of dollars in interest. The House passed a bill that ties rates to Treasury notes. Critics argue that the House bill does not differ significantly from the president’s long-term proposal. Republicans accused the White House of using its push on student loan rates to deflect attention from current political controversies. A discussion of the proposals and what each would mean for students, families and the cost of a college education.
- Aaron Smith co-founder and executive director of Young Invincibles, a national youth organization working to expand economic opportunities for young adults.
- Libby Nelson reporter, Inside Higher Ed.
- David Nakamura White House correspondent, The Washington Post.
- Jason Delisle director of the Federal Education Budget Project at the New America Foundation; former senior analyst on the Republican staff of the U.S. Senate Budget Committee, where he played a key role in developing education legislation.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The White House and Congress are at odds over interest rates on federally subsidized student loans. The rates will double July 1 without congressional action. President Obama urged Congress to extend the current low rates. House Republicans want them to be more market-based. Joining me to talk about student loans: Jason Delisle of the New America Foundation, David Nakamura of The Washington Post, Libby Nelson of Inside Higher Ed and Aaron Smith of Young Invincibles.
MS. DIANE REHMWe'll take your calls throughout the hour. Join us on 800-433-8850. Send us your email to email@example.com. Follow us on Facebook or Twitter. Good morning to all of you. Thank you for being here.
MR. AARON SMITHThanks for having us, Diane.
MS. LIBBY NELSONThank you, Diane.
MR. DAVID NAKAMURAThanks, Diane.
REHMDavid Nakamura, I'll start with you. Tell us about what could happen on July 1 without congressional action.
NAKAMURAWell, Diane, this is a big issue. It was a big issue last year during the campaign. Interest rates which had been cut on these federal -- federally subsidized student loans that affect about seven million students will double from 3.4 percent to 6.8 percent if nothing is done. And so just like last year in the heart of the campaign, the president and Congress are both sort of trying to figure out what to do, unlike last year when they came to sort of a one-year temporary extension of the lower rates.
NAKAMURABoth sides are now talking about something they could do for a longer term. And so the question is what plan do they wanna do. It's not as simple as last year when they simply extended these lower rates. Both sides, Republicans in Congress and the White House, have talked about doing a longer term extension based on market rates that could fluctuate, based on Treasury bonds and so on. We get into the details later, but I think that can -- there's good things and bad things. Those rates are very low right now.
NAKAMURAThey could rise in the future, and that's some of the concerns, I think, for students. So right now, both sides are trying to posture and make their points. The president came out in the Rose Garden last week and sort of -- and laid out his position.
REHMDavid Nakamura, of the -- White House correspondent for The Washington Post. Libby Nelson, how do the two sides agree or disagree on these loan rates?
NELSONWell, the politics of these are really interesting, Diane, because President Obama and congressional Republicans are actually closer to each other in some ways than congressional Republicans are to the Democrats. President Obama, in his fiscal year '14 budget requests which he put out earlier this year, laid out a long-term plan for changing the interest rate. Right now, it's basically a number picked by Congress. He wants to go to a market-based rate.
NELSONCongressional Republicans also want to go to a market-based rate. There are significant enough differences between the two plans that President Obama has said he would veto the Republican bill. But congressional Democrats, on the other hand, want to keep the low 3.4 percent interest rate for another couple of years. There's big higher education legislation coming up fairly sailing, and they said that is really the time that they'd like to deal with this and tackle it. But that won't be between now and July 1. It will be between now and 2015.
REHMLibby Nelson, she is a reporter for Inside Higher Education. Aaron Smith, there's a group called Young Invisibles. Tell us about that.
SMITHSure. Young Invincibles is a national youth advocacy organization. We focus on expanding economic opportunity for young adults and for so many young people going to college, and getting an affordable college education is just central to their economic future, which is why this issue is so important to our generation and why, you know, we were excited last year when Congress came together and was able to find a bipartisan way to extend the lower interest rates and hopefully it'll happen again this year.
SMITHBut it's an issue where it's actually a real signal of the power of students and families to push an issue like this at a time when we know Congress is having a hard time getting things done.
REHMGetting anything done.
SMITHExactly. But hopefully we'll see some progress.
REHMSo how do you see the differences between the president's plan and the Congress' plan?
SMITHSo President Obama and the House plan call for longer term changes, switching to a more of a market-based system. We had some critiques, actually, of both plans. President Obama's original budget plan didn't include a cap on interest rates. We thought -- we think it's important that, you know, in the 1980s, for example, you had student loan interest rates above 10 percent. We don't want to see that happen again.
SMITHOn the flipside, the House Republican proposal, there's been this number out recently that the federal government is gonna make about $51 billion off of students in the student loan program this year. The House Republican program, unfortunately, adds to that. They're essentially using the student loan program to pay down the deficit. And we don’t think that's the right approach either.
SMITHThe third approach, which Libby mentioned, is a shorter term solution to get us to a point where we can really have a good conversation about have to address student loan interest rates. And some have proposed a one-year fix...
REHMYou mean overall.
SMITHExactly. Some proposed a one-year fix. Some have proposed a two-year fix. We prefer a longer term solution so people know what's coming. But with a month left, you know, our options are getting more and more limited.
REHMAaron -- sorry -- Jason Delisle has not yet arrived at the studio. He's director of the Federal Education Project at the New America Foundation. We hope to see him shortly. You just heard from Aaron Smith, co-founder and executive director of Young Invincibles. That's a national youth organization working to expand economic opportunities for young adults. We do invite your calls, 800-433-8850.
INTERVIEWERDavid Nakamura, if you have a market-based solution, would that then mean that as interest rates go up for everyone else, student loan interest rates would also go up? Are both plans focused on market rates?
NAKAMURAThey are. And this is how it would work. And then -- as we know, the interest rates right now are historically low.
NAKAMURASo that's a good thing. I think under President Obama's plan, the rate for next year for students coming into school taking out student loans would actually be, if I understand it, lower than the 3.4 percent. It would start actually lower than it currently is and -- but the problem is that over time, it's expected that these interest rates will rise as the economy improves, and the concern there is that who knows how far. And I think Aaron mentioned that there was no cap on the president's plan. There is in the House plan.
NAKAMURAAnd I think the concern for people is, you know, as these things rise, you know, where does it stop, and how much of a burden is it gonna put on students.
NAKAMURAThe president's economic team put out a analysis of both plans just last week when the president had this event, and they said that over the course of the life of these loans that a student coming to school now who took out an average amount of loans -- $26,000 is the average now for student debt for a student entering school this year -- that the president's plan would save that student about $4,000 over the term of the loan whereas the House plan would not actually would cost $200.
NAKAMURANow that's, again, the White House analysis, which has been, you know, pushed back on by Republicans in the House. But that's where the President's team is trying to sort of get leverage and say our plan is actually a better plan for students.
REHMBut, Libby, isn't that, on its face, sort of an accurate look? If you put no cap on one plan and a cap on the other plan, first of all, where would that cap be? And second of all, if you have no cap, how high could it go?
NELSONWell, there -- that's -- the cap is one of the two big differences between the House Republican plan and Obama's long-term plan. The president's long-term plan, as has been said, doesn't include a cap on interest rates. So if you see interest rates go up, the rates on student loans would also go up. They see a few other ways of preventing people from having to pay back too much, which I'm sure we'll get to later on in the hour. The House cap would set the rates for student loans at 8.5 percent.
NELSONIt couldn't go higher than 8.5 percent and for graduate and parent loans, at 10.5 percent. So the rate could be lower than that, but that's as high as it could get. It's also important to note there are quite a few types of student loans. We're only talking about the interest rate for subsidized student loans, which go mostly to students from low and middle-income families. So if you have other types of student loans, your interest rates aren't going to change on July 1 no matter what.
REHMSo the question becomes, Aaron Smith, how does this discussion fit in with the goals for higher education generally?
SMITHWell, I think that's a really important point, and I think the White House similarly would argue we need to see this in a comprehensive way. And in fact, I think folks on both sides of the aisle would agree student loans is in some ways a symptom of a problem where you have tuition that's going on 5, 6, 7, 8 percent every single year. Some of that is being driven, and quite a bit actually, by cuts at the state level. States have actually cut about 20 percent per student over the last decade.
SMITHAnd that is one of the biggest drivers of growth in cost of public universities and community colleges, which still educate a majority of students in this country.
REHMSo the problem being that the states don't have as much money to give to public universities so, therefore, they've got to up the tuition and lower the amount of student loans they can give.
SMITHSo states are essentially transferring the cost of college from something that used to be a public investment on to the backs of students and families. And unfortunately, that's not a smart approach. That's not the kind of approach that's gonna yield a society where everyone has a decent chance at an education. It's gonna yield a society where some people can afford a good college education and others can't. And I think the student loan piece, we shouldn't lose the broader picture that all these other issues have to be addressed as well.
REHMAaron Smith, co-founder and executive director of Young Invincibles, Libby Nelson, she's a reporter for Inside Higher Education, David Nakamura of The Washington Post. And joining us now: Jason Delisle of the Federal Education Budget Project at the New America Foundation.
REHMAnd welcome back. As we talk about the cost of higher education and the proposals for student loans that are currently being debated between the White House and the House. We have heard thus far from David Nakamura of The Washington Post, Libby Nelson of Inside Higher Ed, and Aaron Smith, co-founder and executive director of Young Invincibles. That's a national youth organization working to expand economic opportunities for young adults. And now we hear from Jason Delisle, who was caught in transport this morning. It's good to have you here.
MR. JASON DELISLEThank you, Diane.
REHMTell us your own thoughts about these two plans, one put forth by the White House, the other by the House.
DELISLEIt's amazing how similar they are. Last year, the president wanted a one-year extension of current policy at the time. And this year, he has proposed something longer term, though, it essentially pegged interest rates on newly issued loans to interest rates in the market. And the House has done essentially the same thing and pegging them to the same interest rate in the market.
DELISLEThere are some very nuanced differences between the proposals. But essentially, they're very, very close, and you wouldn't know that necessarily listening to the rhetoric from the White House. It sounds like the talking points from last year. It's almost as if his advisers have just dust off the talking points that they used last year without actually realizing they've proposed something different this year themselves.
DELISLEAnd that is interest rates on the loans that the president has proposed would actually be higher overall than those proposed in the House plan according to the Congressional Budget Office. That's very different from what you're sort of hearing out there in the media. It's very different from what you're hearing from the White House. So the nonpartisan Congressional Budget Office says lower rates overall over the next 10 years in the House plan compared to the president's plan.
REHMDavid Nakamura, your comment.
NAKAMURAWell, Diane, I think Jason makes a good point. The White House, when you talk about dusting off their talking points, as I mentioned before, they did talk about this last year. And I think, you know, one of the criticisms that House Republicans are saying is Obama, whenever he's in doubt politically, even if it's not even to do with students loans, there's a lot else going on at the White House we know.
NAKAMURAThey're under some bunch of scrutiny for the IRS and the Justice Department's actions. Whenever they're in trouble, the president's natural reaction is kind of go out, give a speech and sort of do a campaign-style event, where surround himself with people who are sympathetic to him, generally, with supporters, students. And so that's the kind of theme you saw the other day, that's why it sounded largely like it and looked like it. It was back to sort of the campaign-style rhetoric.
NAKAMURAThe president often -- and his advisers think they often win, that they can make the House Republicans look like they're stranding in the way even if their -- they passed their own version of the same plan, which Republicans are quick to say. But the president uses the bully pulpit sometimes effectively and can often sort of drive debate. Even last year, we saw a little bit of this down to the wire, the president and the vice president continuing to have events before they got what they wanted in the end. This is a little bit different as we've talked about.
REHMSo as you're putting it, that is how Republicans are portraying it. However, as Jason has said, there are subtle differences, and those were important. Libby.
NELSONYeah. There are two major differences. We already talked about the interest rate cap, which the House Republican plan has and the White House plan does not. The other big difference is in both plans, the rates for a new loan vary from year to year as the rates on treasury bonds go up or down. In the White House plan, once you take out the loan, the interest rate, the day you take it out, is your interest rate for the life of the loan. That means if you take out a loan now when interest rates are low...
NELSON...you're gonna have a great rate all the way through. If you take out a loan four or five years from now, if the economy improves, then interest rates are higher, you're going to be paying a higher rate. The House Republican plan resets the rate on every loan every year...
NELSON...or at least until graduation. You would have the option to lock it in down the line, but automatically, it would reset every year at least until graduation. So that means your monthly payments could change as interest rates go up and down. If you take out a loan when the rates are higher, that could be good news for you. If you take out a loan now, it means your interest rate by the time you get to repayment might be higher than your interest rate is today.
REHMBut if you -- pardon me -- have a cap on the loan you take out today, that would make a huge difference. Would it not, Aaron?
SMITHYeah. We've been strong supporters of having an interest rate cap. The one point I would make is that I actually think given the political climate, it's more important now than ever that the president is out and front and vocal on this issue. You know, we've got less than a month now before July 1. Interest rates are going to double for about seven million students and families, unless Congress takes action.
SMITHAt this point, it's got to be sort of an all-hands-on-deck-whatever-it-takes approach to get something done so students don't see an interest rate hike. And, you know, I think the president's proposal wasn't exactly where we think it needs to be. And -- but I don't think any of the proposals yet are exactly where we need to be. And so having that sense of urgency, that's certainly something that from a student perspective we're feeling is critically important.
SMITHAnd, you know, I hope that all of our congressional leaders feel the same sense of urgency that this isn't the time for sort of political posturing. It's a time to get together and get something done.
NELSONI mean, I -- there a lot of complicated policy questions here, and it's interesting -- it will be interesting to see whether they're able to reach a long-term solution in the next month. There certainly was a time earlier this year when it seemed like that would be possible. You had the Senate Republicans have a plan very close to the president's. House Republicans cited him and his budget request in their own bill, which is something you almost never see. But it does seem like the pressure to keep the rate low is going to be a significant factor.
REHMBut what happened to separate them as they came so close?
NELSONI think there are few things. I think the politics of it continue to be an issue, as David was saying. The president feels under pressure, and this was a good issue for him last year in his campaign. And student groups certainly feel that keeping the interest rate low is their most important priority right now. There's also the fact that the variable rate in the House plan was chained from the president's proposal. That's not in the Senate Republican plan. And it's possible that that difference was enough to maybe drive a wedge between the two sides.
REHMAaron, talk about the advantage of income-based repayment.
SMITHWell, it's a great and important program that unfortunately many student borrowers don't know about. I'm actually on income-based repayment to help pay off my tens of thousands of dollars in student loans. And basically, income-based repayment means that when you make less money, your student loan payments are reduced. When you make more money, your student loan payments are higher.
SMITHIncome-based repayment is designed to work in an environment where the labor market is very tough for young people. A lot of young people are coming out of school right now, and they're out of work, or they're not making very much money. Income-based repayment can sort of ease some of that burden so that ideally over time, you do get into a good a job, you are making a decent income, and your student loan payments can increase over time.
SMITHSo we think it's important actually that one of the biggest problems is that less than about 5 percent of student loan borrowers are actually enrolled in income-based repayment. So when you hear about the student loan default rate and how many student loans or how many borrowers are late on their payments, some of those issues could be addressed if we actually made it easier for people to enroll in income-based repayment.
REHMNow, would that income-based repayment remain as part of the student loan program under both plans? Jason.
DELISLEYup. It's already in law, and it's already been enacted. And I don't think the White House has done a very good job explaining to people why the interest rates are so important to making the loans affordable if your payments are already capped based on your income. So we have this whole debate about whether or not we need an interest rate cap, but the loans already have a payment cap.
DELISLEWould you rather take a payment cap or an interest rate cap? Payment cap is more valuable, and that's what income-based repayment provides you. And the White House has essentially succeeded in getting this very, very generous benefit added to the federal student loan program. I would argue it's the most generous income-based repayment program in the world.
REHMTell me how it works.
DELISLESo your payments are capped, your monthly payments. No matter how much you borrow and no matter the interest rate on the loan, your payments are based on your income, and they are capped at -- between zero and 10 percent of your income, zero and 10 percent of your income. For most people, they will pay far less than 10 percent of their income, and the kicker here is that the terminal loan is also capped.
DELISLESo the loan does not need to be repaid after the borrower reaches 10 or 20 years in payments, depending on their type of employment. So here you have a cap on monthly payments, a cap on annual payments and a cap on the terminal loan. Now, this is what -- this is what's very interesting. The interest rate debate is sort of, you know, small potatoes compared to income-based repayment.
REHMSo what is the overall cost to taxpayers when you've got, number one, these income cap loans, these cap loans all over the place, David Nakamura?
NAKAMURAWell, it's -- I think -- I don't know the exact numbers, but I think what this goes to is something that the president talked about during the campaign, which is that he sort of sees this as the role of government to provide people with this opportunity.
NAKAMURAHe talks a lot -- even now, he's going around talk -- I was at a campaign fundraiser in Chicago with him last week, and he talked a lot about, you know, the economy's getting better and the stock market's up, but there's still many people, especially young people, starting out who still need a break, who still need, you know, talk about homeowners, still need to stay in their homes, college students need a chance.
NAKAMURAYou know, the White House talks a lot about college debt, student loan debt becoming -- replacing credit card debt as one of the biggest drivers of the -- sort of -- the debt -- the biggest driver of debt in the country. And so they think that that not only can hold back investment and other opportunities for the younger generation, but I think the White House was trying to say, we're trying to give people a leg up here.
NAKAMURAIt's all part of -- you know, sort of what presidents focus a lot on the middle class, and that was his big campaign message. And I think even last year, he was talking about these income-based repayment caps and so on. During the campaign, he went to a lot of colleges, and it was a very popular message, frankly, even if, as you say, the president has done a -- not done a great job following up...
NAKAMURA...which he sometimes admits himself and explaining to people how to enroll and get more people involved.
NELSONAs I said, I was struck at the event on Friday. President Obama said, you should all listen to this. Not a lot of you know about income-based repayment, and that is something that I think is very true. The other thing is his plan actually expands income-based repayment even more. The 10 percent of your income right now applies to borrowers of new loans very recently.
NELSONHe would expand it to all borrowers, including those who are currently in repayment. And that's a -- there are other income-based repayment options already available for those people, but that is an expansion of this current and more generous program.
REHMLibby Nelson, she's a reporter for Inside Higher Ed. And you're listening to "The Diane Rehm Show." Can somebody please explain to me what happens to a person who does not repay his or her loans? Libby.
NELSONAbsolutely. Well, it's not very good. It's very hard to actually not pay back a federal student loan, or at least not to make any payments on a federal student loan. The government has huge collection powers, much bigger than private student loan pay -- private student loan banks do. They can garnish your tax refunds. They can garnish your Social Security. Even though, really, with income-based repayment nobody should be defaulting on a student loan, plenty of people still are.
REHMAnd that's a problem, Jason.
DELISLERight. Well -- so you say what happens to someone when they don't repay their loan? Well, it depends. There's two answers. One, if they're using income-based repayment, it is -- you can legally not repay your loan under income-based repayment if your income is too low or your household size is very large.
REHMWhat is too low? What does that...
DELISLESo for a household size of, say, for example, two people, you know, someone with a spouse, you're looking at something like $20,000. So once you have $20,000, and you personally, not your household income -- it's only based on your personal income -- so at $20,000 of AGI, adjusted gross income, no payment on the loan. And, say, for example, you are required to make small payment, say $50 a month. Well, remember, the terminal loan is capped at 10 or 20 years.
DELISLEAnd so once you hit that, you don't need to pay anymore. So you can legally not repay your student loan. So this whole issue of people not being able to pay their loans is essentially one of people either not knowing about this repayment plan or their incomes actually aren't that low, and we don't mean -- that's a legitimate possibility. They may have other debt and other financial complication such that income-based repayment doesn't actually reduce their payment to help their situation. But, you know, you can imagine, since this is such an important benefit for struggling borrowers...
DELISLE...and not an interest rate reduction, by the way.
DELISLEI'm sure you folks covered this earlier. So why didn't the president hold a press release just about this issue instead of the interest rate? Why not talk about that instead?
REHMWhat do you think, David?
NAKAMURAWell, I think there's a couple of things. One is the timing. This doubling of interest rate for subsidized loan will happen in just one month, July. One, they tied it to that, you know...
REHMSo add to…
NAKAMURAYeah, add to, and they were successful last year in the way that they, whether you like it or not, the way they get out there on the campaign-style events and sort of beat the drum on this. But -- and on a broader scale, you know, you look at kind of what the White House strategy is. They don't just think of -- you know, the agencies might, but the White House doesn't think of this in a vacuum.
NAKAMURAThe White House is trying to pin a lot of what's not happening in government on Republicans. Like it or not, whether you blame Obama, whether you blame the House Republican, the White House wants you to blame House Republicans. And so if you say, Obama hasn't done gun control, nothing's happened yet on immigration, we don't have a grand bargain and now the student loan thing doesn't happen, well, the White House's bigger strategy is, as a hedge, 2014, blame Republicans.
NAKAMURAThey didn't get stuff done. They wouldn't do what the president wanted, even in a case where, as we've said, they're pretty close. So I think that's part of what's going on.
REHMOf course the other issue is the cost of higher education itself. It keeps going up. And with that increase in tuition comes more borrowing, Libby.
NELSONAbsolutely. And I think that's really the big issue underlying why what's really kind of a -- very important for borrowers, but kind of a technical issue on student loans has picked up so much resonance. Student debt has been a huge object of national concern in the past couple of years, and this is something that Congress can do. There's a lot of debate about what, if anything, Congress actually can do on the bigger picture issues to force colleges to hold down tuition. There are ideas out there, but this is certainly one of the most straightforward ways they deal with that.
REHMJason, I gather you are opposed to income-based repayment for grad students. Talk about why.
DELISLEThat's right. That's right. So for undergrads, they can only borrow in the federal loan program somewhere around $30,000, and then the government cuts you off. So there's a cap. So if you enter repayment with a limited amount of debt as an undergrad, then IBR is basically a safety net because you will repay those loans at 10 percent of income even if your income -- you know, because of the amount of debt that you borrowed. But a grad student can borrow an unlimited amount of money in the federal loan program.
REHMJason Delisle, he's at the New America Foundation. Short break here. When we come back, we'll open the phones.
REHMAnd as we talk about interest on college student loans which are expected to double by July 1 unless Congress takes action, here's an email: "All the panel members speak of student loans as if the government were trying to take advantage of the poor students. Surely, the students get something out of this bargain. An education subsidy is not an entitlement although it's beginning to be talked about that way. Whatever happened to working your way through college?" Aaron Smith.
SMITHWell, millions of students actually do work their way through college.
SMITHThere's a huge percentage of current students who are full time and working their way through college. There's also a growing percentage of non-traditional students, meaning they're going to school part time and working.
SMITHI -- but I think the point that there's this, you know, that the federal student loan program isn't -- is not inherently bad. Some debt is good debt. If you're using that debt to invest in a college degree that's gonna lead to a good job and going to set you up for a future of success, I think, you know, that's valuable.
REHMAnd it could be seen as an investment for the whole country...
REHM...not just for that one individual.
REHMAll right. Let's open the phones to Miami, Fla. Good morning, Les.
LESHi. Good morning, Diane.
LESYou know, I understand that if you're going from 3 and something percent to up to 6 or something percent, I don't care what anybody says, that almost sounds like a tax hike. And further, you know, I have understood the GOP's plan that, you know, companies are wanting to hire, but there's insecurity about the future of their taxes and what not. But this sort of sounds the same thing as the student loan perspective of the GOP. At least the president's plan, you know, let's you plan for the future. There's some sense of security around that. But I don't see that from the GOP.
DELISLEWell, there's no sense of security around it. Remember, the interest rates on the loans are pegged to the market. So if interest rates go up, the subsequently issued cohorts of loans will carry a higher interest rate. So if interest rates on tenured treasuries are 6 percent, in a couple of years, under the president's plan, interest rates on student loans double. And that plan allows for that. So it's not any more secure or less secure than the House plan.
REHMLet's talk for a moment about another plan out there from Elizabeth Warren, senator from Massachusetts. She calls for a plan that would allow students to pay the low, low interest rate that the big banks pay for short-term borrowing. What about that? David Nakamura.
NAKAMURAWell, I think there -- as we've talked about earlier, there are Senate Democrats who don't buy into either of these two plans that we've talked about because of the uncertainly, because of the fact that rates spikes could happen almost, you know, year to year. And so I think someone like Elizabeth Warren who's recently been elected to kind of push this kind of agenda that she herself when she was in government had talked about is just trying to come up with another solution.
NAKAMURAThis is an idea, I think, that's had supporters and been around to some extent. But with the president onboard with another plan, I don't know how far it's gonna be.
REHMI see. What do you think, Libby?
NELSONCertainly that plan, when it was introduced, picked up a lot of attention very quickly.
NELSONIt really resonated with students. It also is the first legislation that a very famous freshman senator has proposed on her own. Critics, however, point out that there are a lot of differences between lending to a big bank in a short term and lending to an 18-year-old in the long term. I haven't seen any indication that the Obama administration is interested in going in that direction. They have pretty much said that they want to go to a market-based long-term change to how interest rates are determined.
REHMHow would government plans differ from private loan organizations that used to be out there any maybe still are, Jason?
DELISLEThis goes back to the statement that the emailer actually pointed out, was that, you know, aren't students getting something out of these loans? And this is something that's getting lost in this debate, that at 3.4 percent interest rate on your federal student loan or at 6.8 percent, both are below market. They're better than what you can get as a student going into the market. And remember, the government makes these loans to students essentially no questions asked.
DELISLEIf you're going to college, you're eligible. And there are a multitude of repayment options, very flexible. And these are things that the private market is not offering to students...
DELISLE...especially the no-questions-asked part.
REHMAaron Smith, do you wanna comment?
SMITHWell, I would say, there are things like income-based repayment that aren't available to private borrowers. And in fact, in some ways, there are -- the private industry has sometimes been predatory in some of the practices that they've used. But I would also look historically, you know, when the government has invested in students. Look at the G.I. bill, which paved the way for a middle-class society where people could afford a college education, and it's had huge impacts on our overall economy and, I would argue, has led to some of the best schools in the whole world.
REHMHuge deal. Huge deal.
NAKAMURAAnd I think that the president, I would just point out, he often talks about how it -- personal for him. I think he's -- I think Michelle Obama's father may have gone to school on one of these G.I. bills. And then I believe that the president himself talks quite a bit, and he said last -- just the other day, I believe, that he and Michelle only nine years ago were able to repay all their student debt.
NAKAMURAAnd I think that's mostly based on maybe some of his book sales. But -- so, you know, he tries to put in terms of students can understand.
REHMAll right. To Grand Rapids, Mich. Good morning, Leah.
LEAHHello. I was just wondering why is it that the collection agencies that the Department of Education uses has such, seems to me, bullying tactics to get the loan paid. The thing that they wanted me to do is give the name of three friends and family to be connected so that just in case they can't contact me they'd contact them. And I refused. I refused to give anybody else's name to my debt. So they said I refuse to repay. So the category that I was put in is that refusal to repay and now they're garnishing me.
REHMCan you speak to that, Libby?
NELSONThere's certainly have been increasing scrutiny and complaints about some of the Education Department's collection practices, and I think that's -- as more people go into default, that's a trend that probably will continue. It is a government loan, and the government has a lot of power to get its own money back. And that's something that you might not encounter or you might encounter when dealing with a private loan collector.
REHMSo they can legally garnish her wages?
DELISLEYeah, that's right. And the government will often do this at a loss to itself. For example, the cost and time incurred to do this are so substantial that it's not actually going to make itself whole, but it's simply to protect the integrity of the program so that there doesn't become a culture of sort of non-compliance and people think they can't get away with not paying a loan. But there certainly are instances that we do hear stories that sound a little bit unreasonable, and those should be thoroughly investigated.
REHMAll right. To Tampa, Fla. Good morning, Elizabeth.
ELIZABETHGood morning, Diane, and thank you so much for taking my call.
ELIZABETHI think one of things that we're forgetting here with regard to student repayment and all of that, number one -- and something is also mentioned that is -- the disproportionate amount that it takes to educate a regular child, OK, for a college education. My father was a butcher. We had eight children. We are all higher educated. He put everybody through college. But it's disproportionate now based on, you know, the cost of education and what you're getting for that education, which is probably a whole other show in itself.
ELIZABETHBut one of the points that I wanted to make is yes, we're talking about all the students getting all these loans. The other side of that coin is, you know, I am an average, middle-class married woman with one child in college. We both work. We don't get a lot of assistance. We have not, you know, our son is not a stellar student. He's an average student. So, you know, there is -- there's only amount of money that he can get based on what we make. And we are middle class.
ELIZABETHWe don't make a huge amount of money. But we'd make more than we are eligible to get certain things. So when -- he is in college now. He's gonna end up with a boatload...
ELIZABETH...and we also are paying up to now.
REHMIndeed. Now, what's the cut-off point in income for allowing that young person to apply for and achieve a government loan?
NELSONWell, there's no specific income cut-off point. It's based on a pretty in-depth, oh, look at your assets, your income. So it varies from family to family. But generally, the vast majority of people getting a subsidized student loan come from families making under $40,000 a year...
NELSON...which is about the same that are eligible for a Pell grant.
REHMGo ahead, Jason.
DELISLEBut the -- what are called the unsubsidized Stafford loans are available to everybody regardless of family income.
REHMExplain the unsubsidized.
DELISLESo the unsubsidized is essentially the loan which accrue interest while the students is in school, and they have the 6.8 percent fixed interest rate. That's it. So -- and you -- and most students who have the subsidized loan also have the unsubsidized because the loan limits are different. So most people take out both. And so this is a little bit tricky.
DELISLEBut we do need to point that there -- like I said, there are no questions asked on the application essentially for a federal student loan as an undergraduate or even a graduate student.
NELSONAnd since this is a mother of a student calling in, I would also say one of the fastest growing areas of loans are actually federal loans to parents, for their students' college, and that's another one where you can -- there are no income cut-offs for that. The interest rate is also quite a bit higher even then for an unsubsidized loan.
REHMI see. What about these so-called 529s that parents begin putting money into as soon as that child is born, saving for, hoping for sufficient moneys to cover college education? Aaron.
SMITHWell, you now, the tax accounts, they can certainly play a role, and many families do use them. Unfortunately, one of things we see is that the tax system is very complicated. Many parents, again, don't understand necessarily how it works. And sometimes we see the benefits disproportionately helping people at the higher end of the, you know, income spectrum whereas lower income folks don't necessarily have the savings.
SMITHYou know, they're trying to get by. And I think to take it, you know, to take a step back, we are really at a crossroads, I think, as far as higher education in this country, where we have a choice to make whether, you know, it's something that we think all families -- middle class, working class, upper class -- can afford or not. And all these issues point to this underlying question of the cost of college and having to -- figuring out a way to get a hold of the cost of college.
REHMAll right. Basic question here from Catherine in Baltimore. She's unclear, "Do all student loans go up if nothing is done? Does this includes -- include loans that students who have already graduated are currently paying now?" Libby.
NELSONI'm still glad someone asked that question because I think there is a lot of confusion on this. This is only for new borrowers of new unsubsidized student loans.
REHMI'm sure she'll be very relieved to hear that. All right. Let's go now to Tulsa, Okla. Good morning, Bill. You're on the air.
BILLDiane, I've been waiting for months to get in on this discussion.
REHMWell, you're here.
BILLI am absolutely irate as what happened going on right now and going on for the last few years. I was graduated from high school in 1947. I went in the Army to -- I'm 84 -- 83 years old now. I went in the Army to get -- part of a GI Bill. I worked summers, and I paid for my college education. And when I was done, I had $300 leftover, and I bought my first car.
REHMGood for you.
BILLMy grand -- my children, when they went to college, we subsidized them, and they earned their play money. We paid their room, board and tuition and all that sort of stuff, and they earned working different jobs. They weren't earning enough money to, you know, belong to a sorority or fraternity, all that kind of stuff. My grandsons, who are now 24 and 30, they have debts that -- both of them have master's -- and one of them has a debt somewhere around 45,000, and the other one is about 68,000. That is absolutely terrible.
REHMAll right. Bill, thanks for calling, and you're listening to "The Diane Rehm Show." I think Bill's GI experience certainly is clear and understandable with those GI loans, which, as you said, help create the middle class in this country. The fact that his grandsons have these thousands of dollars in loans speaks to the question of cost of higher education. Would you agree, Jason?
DELISLEWell, here's the key distinction now. He said both of his grandsons have master's degrees. So we're talking about master's degrees. We're not talking about a four-year bachelor's degree. And master's degrees are very expensive. And the people who get them already have a college degree. So this is a decision they're making. They've already achieved this public policy goal that we all want to -- the programs to help people achieve, which is to good -- an undergraduate to be.
DELISLESo it's unclear if all of this debt for his graduate -- for his grandsons comes from graduate school. And if that's the case, let's go back to this earlier point I made. The federal government will let you borrow an unlimited amount of money to pay for graduate school. I think for most people, that sounds like a problem. And then lo and behold, you have all of these stories about people with too much debt from graduate school.
REHMThere is someone on the line whose call we cannot take because we're almost out of time. She says she has $240,000 in loans. She is only paying interest. And if, you know, it's gonna take her decades to pay that off. So we go back to the president's plan, we go back to what's happening in Congress. Do you believe Congress will do something that there will be a meeting of that deadline, David?
NAKAMURAWell, it's a good reason to be skeptical in this climate that we're in. On the other, I've, you know, last year, we went right down to the deadline. It was probably an easier solution because it was one-year temporary fix. It's possible that you could see something along those lines, frankly, a longer term, bigger solution, I don't know. But don't rule out the idea of, you know, this going down to the last minute and then someone bring up some middle ground at least for a temporary solution.
REHMWhat do you think, Jason?
DELISLEI'm not sure. I think that because the White House is sort of looking for a fight on this and the fact the proposals are so similar, I think the White House and the president just really want the issue.
NELSONI'd be surprise if there's a long-term solution in the next three to four weeks. But I also was surprised earlier that they were so close on their original plans.
SMITHI think there's a good chance of reaching a deal. You look at the Senate's two-year deal, I think there's starting to be some coalescing.
REHMI like optimism. Aaron Smith, Libby Nelson, David Nakamura, Jason Delisle, thank you all so much.
DELISLEThanks a lot, Diane.
REHMAnd thanks for listening, all.
NAKAMURAThank you, Diane.
REHMI'm Diane Rehm.
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