Republicans in the House of Representatives and President Barack Obama agree in general on what to do with student loan interest rates: Let them vary with the market.
Congress now sets the rate, but a plan from House Republicans would base it on market rates instead. If it becomes law, subsidized loans – those that don’t accumulate interest while a student is in school – would have a higher interest rate next year. Unsubsidized loan rates would be lower. In the next five years, if interest rates rise as expected, student loans would cost more.
The White House plan is similar, but would use a different formula than that set forth by House Republicans.
Under current law, the interest rate is scheduled to go up from 3.4 percent to 6.8 percent on July 1 for subsidized student loans. The law expired in 2012, but a one-year extension kept the rate low last year.
Some House Democrats and student advocates say Congress should continue to set a low rate, at least for now.
Some lawmakers also are asking whether Congress could use the savings from ending the low rate to increase grants for low-income students or to help students who face defaults. Those might be some of the issues up for debate Thursday, when the House Education and the Workforce Committee considers amendments to a student loan interest-rate bill sponsored by Reps. John Kline, R-Minn., and Virginia Foxx, R-N.C., and sends it to the full House.
The White House and House Republicans have been at odds lately on almost everything else. It remains to be seen, though, whether the student loan plan gets support from some House Democrats and what approach the Senate takes. So far Democrats on the House education committee have said they oppose the legislation because it would make the cost of education for those who borrow more expensive if interest rates rise as expected in coming years.
Foxx said in an interview that since the plan is similar to one from the White House, “what we hope is that they will get the folks on their side of the aisle in line and get support for it.” She said the legislation “gets politicians out of the business of setting student loan interest rates” and “allows the market to operate.”
Under the Republican proposal, the interest rate on subsidized and unsubsidized student loans would be set at the 10-year Treasury note rate, which is now about 1.95 percent, plus 2.5 percent. That would make the rate about 4.4 percent for the upcoming school year if the proposal became law.
The change would mean a reduction in the rate for unsubsidized loans, which was 6.8 percent this year.
The bill would set student loan interest rates once a year, based on the market. Students could consolidate their loans and lock in a fixed rate based on the average of their loan rates, or keep the market-based rate.
PLUS loans, which are used by graduate students or by parents of undergraduates for their children’s education, now have a 7.9 percent rate. That rate would be about 6.3 percent under the proposed House formula.The measure would cap interest rates at 8.5 percent for federal student loans and 10.5 percent for the parent and graduate student PLUS loans. PLUS loans are granted for education without regard to income, but they require a credit check.
Democrats on the education panel said they wanted to freeze the current 3.4 percent rate on subsidized loans for the next two years and keep other education loan rates stable as well.
Student loan debt in the U.S. has been growing and now totals $1.1 trillion, second only to mortgages.
The president’s 2014 budget proposal calls for somewhat lower interest rates than the Republican proposal does. Subsidized loans would be set at the rate of the 10-year Treasury note plus 0.93 percent. Unsubsidized loans would be set at the Treasury rate plus 2.93 percent, and PLUS loans would be set at the Treasury rate plus 3.93 percent.
The White House plan has no cap, but all borrowers would be able to use a pay-as-you-earn plan that would cap monthly payments at 10 percent of discretionary income.
Student loan rate proposals also are starting to appear in the Senate.
One of them, by Sen. Elizabeth Warren, D-Mass., would allow students to pay 0.75 percent for one year, the same rate that banks pay when they borrow from the Federal Reserve. Warren said a year would give Congress time to figure out a long-term plan for interest rates.
Two nonprofit education organizations, The Institute for College Access and Success, and The Education Trust, issued a statement last week criticizing the Republican House proposal, saying it would make federal student loans “much more costly” in the future.