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Bills Seek to Address Student-Loan Interest-Rate Hike

By Alyson Klein — May 09, 2013 3 min read
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Student loan interest rates are slated to jump from 3.4 percent to 6.8 percent this summer, unless Congress and the administration do something to stop it. And there are a whole bunch of proposals out there to head off the interest rate hike (which was a big election year issue back in 2012.)

Today, U.S. Rep. John Kline, R-Minn., the chairman of the House education committee, put forth legislation that would tie student loan interest rates to the 10-year Treasury note, plus 2.5 percent (for both subsidized and unsubsidized Stafford loans. If that sounds familiar, that’s because it’s pretty similar to what was in President Barack Obama budget request.

Here’s the big difference between the House proposal and the Obama budget: The House would set a cap of 8.5 percent on Stafford loans (which are taken out by students) to protect against the possibility of sky-rocketing interest rates, while the Obama administration is instead pushing a big expansion of Income-Based Repayment programs, so that graduates don’t have to direct too much of their income towards student loans, no matter how high interest rates jump. Also, the Obama administration tacks on only 0.93 percent for subsidized Stafford loans to the ten-year Treasury note rate—so subsidized Stafford loans for students would presumably be cheaper under their proposal, at least initially. But the administration would tack 2.93 percent onto unsubsidized Stafford Loans, which could mean the rate for those loans would be a bit higher than under the House GOP proposal.

Another key difference: Under the Obama proposal, rates are set at the beginning of the academic year and stay fixed for the life of the loan. Under the House GOP proposal, rates reset each year. But upon graduation, students can package their loans together, take the weighted average of the interest rate on their loans and lock in that rate for the life of the loan, a House GOP aide explained.

Kline sees this as permanent fix to the student loan interest rate problem, which has essentially been a political football in recent years. “As I’ve said time and again, we’ve got to stop kicking the can down the road with short-term fixes to the interest rate problem,” Kline said in a statement.

And a House GOP aide said that based on current rates students would pay 4.32 percent starting in July under Kline’s proposal. That’s obviously not as low as the current 3.4 percent rate, but it’s lower than 6.8 percent. Of course, interest rates are at historic lows and are likely to jump up in the future.

But Rep. George Miller of California, the top Democrat on the committee, is not a happy camper. “This is just another classic bait-and-switch scheme: lure you in with a short-term lower rate, but then charge you higher rates in the long term. A lot more,” he said in a statement. Under Miller’s projections, interest rates for a freshman entering college next year may be higher upon graduation than under current law. Based on the Congressional Budget Office, Miller’s staff have estimated that rates would be as high as 7.4 percent in fiscal year 2017.

Meanwhile, other congressional Democrats have come up with their own solution—and it’s pretty different from both the White House proposal and the House GOP bill. Under the proposal, which was introduced this week by U.S. Senators Jack Reed of Rhode Island and Dick Durbin of Illinois, as well as Reps. John Tierney of Massachusetts and Joe Courtney of Connecticut, loans would be adjustable (not fixed) and would be tied to a different market-based rate, the 91-day Treasury bill, plus a percentage that would be determined by the U.S. Secretary of Education to cover program administration and borrower benefits.

And under the congressional Democrats’ plan, interest rates on subsidized Stafford loans (which go out to the poorest students) would be capped at 6.8 percent, while rates for unsubsidized loans would be capped at 8.25 percent. Students with fixed rates could “refinance” their loans under the proposal.

Meanwhile, Senate Republicans have their own loan proposal, which would also be tied to the ten-year treasury rate, plus 3 percentage points. More here. And Sen. Elizabeth Warren, D-Mass., has proposed to drop student loan interest rates down below 1 percent, to the same level as government loans to banks. More here.