House Backs Variable Rate Student Loans

Democrats call the measure passed today the "Make College More Expensive Act."

Posted: 05/23/2013 04:51 PM EDT

WASHINGTON (AP) — House lawmakers on Thursday approved legislation that links student loan rates to the ups and downs of the financial markets in spite of a veto threat from President Barack Obama.

The Republican-backed the 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.

"We have an opportunity today to get politicians out of the business of setting student loan interest rates," House Education and the Workforce Committee Chairman John Kline. "We have an opportunity to provide students more stability in the long run by putting an end to quick fixes and campaign promises. And we have an opportunity to build upon common ground with the administration and advance a bipartisan solution that's a win for both students and taxpayers."

Interest rates on new subsidized Stafford loans are set 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.

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.

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

Under the GOP 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 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 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.

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(Photo: Ruslan Dashinsky/Getty Images)

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