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How Student Loan Impasse Went From Bad to ‘So What?’

Next Wednesday has already been established as a critical date in the House, because it’s when Republicans will meet to decide their next move in the immigration debate. But July 10 also looms as a big day in the Senate, because that’s when a pair of roll calls will decide whether the student loan impasse will be broken before it becomes a potentially expensive hassle for millions.

It’s much more difficult than usual to predict the ultimate outcome, given the unusual legislative dynamics behind the standoff.

The normally united caucus of Democratic senators has split over what to do next, while the Republicans are sounding much more interested than most Democrats in pursuing something similar to what President Barack Obama wants. And the House, which has spent all year deferring to the Senate because of all the division within the GOP majority, has taken the lead in the matter by passing a plan to revamp the whole system, doing so with almost unanimous Republican support.

It’s also tougher than usual to forecast when the issue will be resolved, given that Congress has just ignored the statutory deadline with almost no outward care about the consequences.

Congress went home this week without preventing the scheduled doubling of interest rates on newly issued subsidized Stafford loans. So on Monday, the cost of borrowing for college that way skyrocketed — at least on paper — to 6.8 percent from the 3.4 percent it’s been fixed at for four years.

For about 7 million students and families who take out these loans every year, that means the theoretical debt burden after graduation has gone up by at least $1,000 and maybe as much as $2,600. (The range has mainly to do with varying estimates about the size of the typical loan.) Given that Americans already owe more on education loans than on either credit cards or car payments, passively permitting the cost of a college education to rise looks to create significant economic consequences down the road.

It would also stand to have significant political consequences very soon. But, so far, not so much. There are three reasons for this lack of urgency.

Absence of agreement on student loans has taken justifiably second billing as the big news out of Washington — it’s way behind immigration, gay marriage, voting rights, Edward Snowden and the government snooping he’s exposed.

The education debate is more complex than usual, and the players seem to have concluded that buying time is permissible since this isn’t an election year. (Last summer, the previous student loan deadline became a several-week cause célèbre in the presidential race, before both campaigns concluded it best to maintain the status quo until now.)

Finally, there’s belated but bipartisan agreement that busting the July 1 deadline has no practical downside. Most student loans are issued just a couple of weeks before classes begin, so a deal before the August recess could easily preserve the lower rate for the relative few who borrowed for summer school. Even if the standoff lasts longer, payments on new Stafford loans don’t start for a year, and that’s only for people graduating next spring.

So with some bureaucratic effort, the rate could be made retroactive anytime before the Class of 2014 crosses the stage.

Obama’s team really believed it had a way around this morass: make common cause with Republicans by proposing to link the rates closely to free-market conditions by tying them to 10-year Treasury notes. But they didn’t seem to anticipate either party’s reaction to the idea, a surprise buried in his April budget.

Congressional Democrats were not only annoyed they hadn’t been asked for buy-in beforehand, they also objected to the president’s conservative-leaning idea of having no upfront cap on the rates, which they fear will mean soaring costs for young adults in an improving economy.

House Republicans, meanwhile, gambled that they could one-up Obama’s proposal and still get his support. But the even-more-forceful free-market approach of their bill was labeled veto bait.

Those are the basic parameters of the current standoff. Three senators in the Senate Democratic caucus have offered a bit of a mashup between what Obama proposed and what the House passed, and the GOP leadership has given its stamp of approval. But since no other Democrats look ready to join the coalition, the proposal looks to top out at 49 votes during the first roll call of July 10.

There’s more suspense about whether 60 votes exist for the alternative: reverting to the 3.4 percent rate for one more year and covering the $4.2 billion cost by tweaking the tax treatment on inherited IRAs and 401(k)s. Democratic leaders are now rationalizing such a move as a way to synchronize student loan policy with the coming rewrite of the main higher education law.

If all 54 on their side will go along, and are joined by six Republicans, the House may decide it has no choice but to abandon its ambitious idea. And if that happens, one of the early bright hopes for a genuinely important domestic policy deal this year will go down in the record books as nothing other than another case of kicking the you-know-what down the you-know-where.

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