After Congress failed to reach a deal last week, the interest rate on new subsidized Stafford loans officially doubled from 3.4 to 6.8 percent on Monday. Though there's speculation that Congress may vote on a retroactive change next week, there still appears to be a big divide between those arguing for tying loans to market rates and those arguing for another temporary extension of the 3.4 percent rate. So we think it's time to explore some more creative solutions to the Game of Loans problem. Below are some suggestions, but feel free to offer your own in the comments.
(If you want to see a more serious estimate of how much the change will cost new loan borrowers, check out this helpful calculator on Ed Money Watch. You should also check out KC Deane's excellent alternative hashtag suggestions here.)
A National Lottery
The 3.4 percent interest rate was chosen because it was half of an already arbitrary number. So why not make the entire system transparently random. Each year, the President and the Secretary of Education would host a nationally televised lottery drawing similar to the ones used on local TV affiliates. Each would draw one number between 0 and 9, which would be separated by a decimal point to form the fixed interest rate on all subsidized loans for that year. As an added feature, the drawing would end with randomly choosing one student-to-be who would receive automatic loan forgiveness on all their undergraduate Stafford loans. The cost of years when the rate was lower than expected would be offset by either higher random rates in other years or by taxing any betting action that occurs on the national lottery.
Tie it to Congressional Approval Ratings
It's Congress' responsibility to solve the interest rate issue, so why not tie the rate students receive directly to its job performance? Each year, the interest rate on subsidized Stafford loans would be equal to Congress' approval rating divided by 10. Rates would be higher when its approval rating was better, but that's OK since a well-liked Congress should be helping the economy by passing bills and solving challenges. And in the more common case when Congress is less popular than Nickelback, then students would at least benefit from the dysfunction.
Spread the Cost of Doubling Among Students, Institutions, and States
A doubled interest rate will raise the cost for students of repaying their loans. But even keeping it at 3.4 percent does not deal with the real underlying problem--the extent to which students need to borrow for college and how much debt they are taking on. So why not pursue a solution that tackles both challenges? Students' rates would be allowed to increase by just under 50 percent--to 5 percent. In exchange, institutions of higher education would reduce their cost of attendance by half of the net present value of what students would save if the rate stayed at 3.4 percent instead of doubling--a few hundred dollars. That cost of attendance decrease could be financed by states or institutions depending on how they worked it out. While students would pay more than a simple extension, the hit would be at least partially offset by the lowered cost of attendance.
Getting a deal done ultimately requires agreements between the House and Senate, likely with some say from the Administration. So why not get Rep. John Boehner (R-Ohio), Sen. Harry Reid (D-Nev.) and either President Obama or Education Secretary Arne Duncan to join a game of LOANS (a variation of the popular basketball game HORSE). The winner would get his plan enacted. Since the President and Arne are probably a bit better than Boehner or Reid, they'd have to start with "LOA" to make it fairer. Betting action on this game could also be taxed to offset the cost of adopting any plan that costs money.
Let the NSA Decide
You know it's watching everyone anyway.
(Hat Tip to Alex Holt on the NSA suggestion)