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Originally published May 23, 2013 at 12:34 AM | Page modified May 23, 2013 at 12:36 AM

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House to vote on variable rate student loans

House lawmakers are ready to pass legislation that links student loan rates to the financial markets in spite of a veto threat from President Barack Obama.

Associated Press

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WASHINGTON —

House lawmakers are ready to pass legislation that links student loan rates to the financial markets in spite of a veto threat from President Barack Obama.

Supported by Republicans, the bill would avoid a rate increase for students with new subsidized Stafford loans if lawmakers pass it, as expected, on Thursday. Democrats generally opposed the measure, which would provide some students a deal in the first years of the new system before ratcheting up interest rates later.

"As the economy continues to recover and at a time when market interest rates are at historic lows, more than 7 million students who rely on these loans to finance postsecondary education should not be burdened with additional college debt as they seek to graduate, launch a career or a business, start a family or buy a house," the White House Office of Management and Budget said in a memo announcing its opposition.

The top Republican on the Education Committee, Rep. John Kline of Minnesota, said Obama was standing against many of the ideas he included in his own budget.

"The legislation is based on the president's own proposal and provides a solid basis for negotiation through the legislative process," Kline said.

Interest rates on new subsidized Stafford loans are set to double, from 3.4 percent to 6.8 percent, for new loans on July 1. Lawmakers said they wanted to avoid that but were divided on how, exactly, to accomplish that. With most lawmakers set to leave Washington for the Memorial Day holiday, time is running short.

"They'll be out all next week," said Terry Hartle, a top official with the higher education lobbying group the American Council on Education. "They'll have four weeks to figure it out."

Senate Democrats are weighing a number of options for avoiding the rate increase.

Lobbying from consumer groups and student organizations is adding pressure and is set to escalate as students leave campus for the summer.

"The House is poised to throw college students under the bus by approving a student loan plan that drives up their costs," said Christine Lindstrom, higher education director for the consumer advocacy group US PIRG.

"Students are better off letting the subsidized Stafford loan rate double to 6.8 percent on July 1" than agreeing to the House Republicans' plan, she added.

Some Democrats are seeking an extension of the current rates until Congress takes up a higher education bill later. Republicans have rejected that as costly and irresponsible.

"I would love to have the rates at 2 percent. It's just not realistic," Rep. Phil Roe, R-Tenn., said during hearings on the bill.

A two-year extension of the 3.4 percent rate for subsidized Stafford loans would cost taxpayers about $9 billion.

Last week, the GOP-led House Education and the Workforce Committee approved its bill, which would offer some students a better deal at first. Democratic critics warned that graduates would face steadily climbing rates and costs over the long haul if the markets change.

"I'm not really thrilled with the Republican plan, which would make student loan interest rates a variable interest rate and could rise above 6.8 percent, which is what the interest rate would rise to if Congress did nothing," said Rep. Mark Takano, a California Democrat who taught in public high schools before his 2012 election to Congress. "The Republican plan is unacceptable and worse than if we do nothing."

Under the GOP proposal, student loans would be reset every year and based on 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.

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 GOP 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 GOP proposal.

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.

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Follow Philip Elliott on Twitter: www.twitter.com/philip-elliott

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