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Borrowing time

INTEREST RATES on federally backed student loans will reach record lows this year, but Uncle Sam won't be celebrating - it costs the government big bucks when plummeting rates encourage student borrowers to consolidate their loans at low, fixed rates.

So some in Congress would like to end fixed rates for consolidated student loans and charge only variable rates. It's a terrible notion, potentially driving up the expense of college for some students as they'll pay more tomorrow on money they borrow for school today.

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The option of signing on for variable rates has always been a gamble - and, in fact, a very good gamble for borrowers in recent years. As rates fell, some were able to save as much as $4,000 over the course of a loan, the Congressional Research Service has estimated.

But what goes down must rebound. No one anticipates that the lowest interest rates in the history of the federal student loan program will hold, so student borrowers and their families may not soon again have it so good: Under the variable rates proposal, the average student graduating this year would pay an extra $3,000 over 10 years, the research service estimated.

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Lawmakers say they have to find a way to reduce the cost to government of managing the more than $50 billion in student loans received by about 7 million Americans a year. The government guarantees lenders' rate of return, so one of its big expenses when interest falls and students refinance is paying lenders a subsidy to cover the difference in their earnings. A recent study by the General Accounting Office estimated that the subsidies on 2003 loans would rise to $3 billion, up from $1.3 billion in 2002, for one of two major federal loan programs.

In recent years, the College Board and other groups that track college aid have noted a surge in student debt. With the current rates favorable - repayment on certain Stafford loans will be 2.77 percent starting July 1 - and tuition rising, increasingly students have been turning to loans to cover the gap between their financial aid and their expenses.

Students ought to be able to enroll in college today knowing what it's going to cost them. Eliminating the fixed-rate option could not only make consolidation less attractive down the road, but over time drive up the expense of college for some families.

There are other ways to tackle the problem of managing student loan programs' costs: The lawmakers should focus instead on proposals that would reduce the cost of doing business with the lenders, including rethinking the subsidies and other guarantees.

In addition, lawmakers should consider GAO recommendations, including improving alternative repayment programs, making consolidation available to more students, and using the repayment program better as a tool to prevent defaulting, especially among graduates entering low-paying public service careers.


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