While Congress squabbles about how to prevent student loan interest rates from doubling, economists say the rate issue does nothing to fix the core problem for American students: the high cost of college and the heavy debt burden it creates.
Interest rates on millions of new federal student loans will double to 6.8 percent next year, unless Congress acts by July 1.
With just one day before Congress adjourns for the July 4 holiday, a bipartisan solution has yet to emerge. Such a big rise in rates would hurt many borrowers: Students with an average college loan debt of $27,000, for example, would pay an extra $1,000 for each year of college.
Congress postponed the interest rate issue last summer rather than deal with it during an election year.
Some lawmakers expect there may be a retroactive fix after Congress returns from its weeklong recess, or a short-term patch that keeps rates low while they negotiate a long-term solution.
Experts say the attention to rates, while important, does not address the bigger problem.
"This is just a sideshow," said Brian Bethune, professor of economics at Gordon College in Wenham, Massachusetts.
Student loan debt in the United States exceeds $1 trillion and is already affecting economic decisions by young people, such as buying a house or saving for retirement. The Federal Reserve has warned about an alarming rise in delinquent loans.
The cost of attending a four-year public institution has gone up by 5.2 percent each year in the last decade - far more than the inflation rate, according to the Consumer Financial Protection Bureau.
The rise has occurred as university administrative costs have steadily climbed and as cash-strapped states cut funding to public colleges. That has pushed more of the cost burden on students, said Brookings Institution economist Barry Bosworth.
Setting rates to the market will not fix these problems and will have little impact on borrowing habits, as students rarely consider the interest rate when taking out a loan, analysts say.
"What you see in the debate is people are grasping at this abstract concept of 'affordable,'" said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation. "That's really hard to measure because that's different for everybody, and the interest rate is not necessarily the way to make a loan affordable."
Experts say lawmakers should be focusing on broader reforms such as reining in the cost of tuition, helping students make more financially sound choices, and making the government's income-based repayment program more accessible.
Under current law, federal loan borrowers can enroll in an income-based repayment plan, capping their monthly payments at 10 percent of their discretionary income.
That program should ensure that paying back loans doesn't become overly burdensome even if rates rise. But Delisle said he hears complaints that the program is poorly advertised and that enrollment is too complicated.
"Why aren't we focusing on that?" he said.
Former World Bank chief economist Joseph Stiglitz has warned that the growth in student debt could result in a damaging explosion similar to the collapse of the housing market.
One of his main proposals is to integrate the federal student loan repayment system with the Internal Revenue Service.
In such a system, student loan debt payments are income-contingent and automatically taken out through the tax withholding system, reducing the guesswork for the borrower.
"It's a system that has been working very effectively in Australia," said Stiglitz, who is now a professor of economics at Columbia University.
The Consumer Financial Protection Bureau has also jumped into the student loan debate and has nudged Congress to pass legislation that would make it easier for students to refinance.
Democratic U.S. Senators Kirsten Gillibrand, Sherrod Brown and Heidi Heitkamp have introduced bills that would create more refinancing options, but so far there has not been a groundswell of support.
KEEPING COSTS IN CHECK
Analysts say neither lower interest rates or repayment systems address the major problem: the lump sum of debt students leave school with and the toll it takes on their finances.
So far, the federal government has had limited success in pressuring states to control the cost of public university tuition.
Obama in January 2012 laid out a plan to withhold federal funds from public colleges that do not keep tuition costs in check. Despite his efforts, the average tuition cost at public colleges rose by a record 8.3 percent in 2012.
Economists advocate forcing universities to disclose more information about their programs, completion rates, job prospects and earning potential to prospective students to help students make well-informed choices about how much they borrow.
"I think students as consumers of education have to be better informed of the risk they are taking when they take out a student loan," said Deborah Lucas, professor of finance at Massachusetts Institute of Technology.
Congress has introduced various bills that would require universities and lenders to disclose more about borrowing options and costs, but none passed in the past couple years.
REINING IN PRIVATE LENDERS
The CFPB also has pushed lawmakers to rein in private lenders, who it says offer riskier loans and more stringent repayment terms than the federal government.
While private loans constitute only 15 percent of student debt, they are more likely to be used by high-debt borrowers, according to the consumer agency.
Of those that graduated during the financial crisis with more than $40,000 in debt, about 81 percent used private loans. The agency wants private lenders to offer more flexible and affordable repayment terms to borrowers.
The CFPB wants legislators to require private lenders to offer more flexible and affordable repayment options. The agency also wants lawmakers to review current bankruptcy laws that make it difficult to discharge student loans through bankruptcy.
Rohit Chopra, student loan ombudsman at the CFPB, told a Senate Banking Committee on Tuesday that Congress must look beyond the current heated debate over rates.
"While there has recently been considerable discussion about interest rates on federal student loans for next year, it will be important to address the potential impacts of the heavy burdens for millions of Americans already in debt."
(Reporting by Elvina Nawaguna and Leah Schnurr; Editing by Karey Van Hall and Doina Chiacu)