May 24, 2013

House links student loan rates to markets

One Republican calls the bill a starting point for negotiations with the Senate and White House.

The Associated Press

WASHINGTON - Dismissing a veto threat from President Obama, lawmakers in the House passed legislation that links student loan rates to the ups and downs of the financial markets, in a vote largely along party lines.

The Republican-backed bill would allow students to dodge a scheduled rate hike for students with new subsidized Stafford loans next month, but rates could rise in coming years. Democrats largely opposed the measure -- which they branded the "Making College More Expensive Act" -- while the Republican chairman of the Education Committee labeled the legislation a starting point for negotiations with the Senate and White House.

"The American people sent us here to tackle tough issues, not kick the can down the road. The time to act is now. Students, families and taxpayers cannot afford further delay," House Education and the Workforce Committee Chairman John Kline said after the vote.

Interest rates on new subsidized Stafford loans are due to double, from 3.4 percent to 6.8 percent, on July 1. Lawmakers from both parties say they want to avoid the increase but were divided on how.

Democrats are seeking a two-year extension of the current rates until Congress takes up a higher education bill. Republicans have rejected that proposal as costly and irresponsible.

The House measure passed by a vote of 221-198. Eight Republicans and four Democrats broke from their party.

By some counts, student loan debt has topped $1 trillion and surpasses credit card debt in size. Only mortgage debt is larger.

Under the Republican proposal, student loans would be reset every year, pegged to 10-year Treasury notes with added percentage points. For instance, students who receive subsidized or unsubsidized Stafford student loans would pay the Treasury rate, plus 2.5 percentage points starting for loans issued after July 1.

Current subsidized Stafford loans are offered at a fixed 3.4 percent rate and unsubsidized Stafford loans are offered at 6.8 percent. The interest rate on loans to parents and graduate students is 7.9 percent.

Using Congressional Budget Office projections, the Republican plan would translate to a 5 percent interest rate on all Stafford loans in 2014, but the rate would climb to 7.7 percent for loans in 2023.

Stafford loan rates would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent ceiling under the Republican plan.

In his budget proposal, Obama included flexible rate student loan rates pegged to 10-year Treasury bills. The president did not limit interest rates but included a smaller added interest rate. His plan also expanded income-based repayment options and loan forgiveness.

Even so, many students said they were frustrated by the current rates.

"It's ridiculous that students are being charged 6.8 percent interest, when you can get a mortgage on a house for 3.5 percent," said Zach Nostdal, a graduate student at Seattle's University of Washington.

 

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