House Panel Approves Market Approach to Student-Loan Interest Rates

May 17, 2013

With interest rates on some federal student loans set to double in just over six weeks, and members of Congress and President Obama scrambling to avert the increase, a key Congressional panel on Thursday approved legislation that it said would solve the problem for the long term.

The White House and most Republicans are pushing a permanent fix, with interest rates tied to federal borrowing costs. Democrats are divided on the issue, with some suggesting a more generous market-based rate and others favoring an extension of current rates.

On Thursday the House education committee passed a bill, HR 1911, that would switch to a market-based formula for setting rates, similar to the president's budget proposal for 2014. Two Democrats joined all Republicans on the committee in approving the measure: Rep. Jared Polis of Colorado and Rep. John A. Yarmuth of Kentucky.

Debate over the bill was heated, with Republicans arguing that borrowers would benefit from a market-based formula, and Democrats contending that the measure, which would direct any savings to deficit reduction, would balance the budget on the backs of students.

"Student borrowers shouldn't have to ride the roller coaster of political largess, wondering every year whether Congress will intervene in time to keep their student-loan rates low," said Rep. Virginia Foxx of North Carolina, chairwoman of the higher-education subcommittee. The bill, she said, would "remove politics, uncertainty, and confusion from the rate-setting equation" by taking politicians out of the process.

Rep. John P. Kline Jr., the Minnesota Republican who is the committee's chairman, said the bill offered a rare opportunity for bipartisanship, given its parallels with the president's plan.

'Classic Bait and Switch'

But Rep. George Miller of California, the committee's top Democrat, said the bill offered a "classic bait and switch," promising borrowers low rates, then raising them when market rates increase. He and other Democrats argued that the bill bore little resemblance to the president's plan since it would reset rates annually, rather than fixing them for the duration of each loan.

"You want to get on a roller coaster, get on a variable-rate mortgage," said Rep. Joe Courtney, Democrat of Connecticut, warning that the bill would "repeat mistakes" like those that led to the mortgage bubble.

On the eve of Thursday's debate in the committee, Democrats released an analysis by the Congressional Research Service that estimated that students who borrowed the maximum amount of Stafford loans over four years under the Republican plan would each pay $1,832 more in interest over the life of their loan than they would if rates were allowed to double.

Asked about the analysis on Thursday, Representative Kline told reporters that the projections reflected changing market realities. "Markets change. They go up, and they go down," he said. "We believe we have provided protections in case rates go really high, and we offer an opportunity for rates to be lower when markets go down."

The committee also approved a bill, HR 1949, that would require a Congressional advisory committee to study the feasibility of reporting students' postgraduate earnings and other outcomes data. That measure, proposed by Rep. Luke A. Messer, Republican of Indiana, is a response to a bipartisan Senate bill that would link individual student records to wage data in an effort to better inform prospective students about their college choices.

Many Options, Little Agreement

Lawmakers have until July 1 to reach agreement on a plan to block the interest-rate increase. If they fail, rates on subsidized Stafford loans will rise to 6.8 percent and borrowers' monthly payments will increase, albeit slightly.

In early April, the White House issued a budget that proposed switching to a market-based rate, with no cap. The move came as a surprise to advocates for students and some members of the president's own party, who see a cap as a key safeguard for borrowers. Since then, lawmakers in both parties and both chambers have weighed in with their own solutions.

Under the Obama administration's proposal, borrowers with subsidized Stafford loans would be charged a rate equal to the 10-year Treasury note plus 0.93 percentage points; borrowers with unsubsidized Stafford loans would pay an additional two percentage points; and parents and graduate students with PLUS loans would pay three percentage points more.

The House Republican bill approved on Thursday would set interest rates higher on subsidized and PLUS loans, but would cap them at 8.5 percent for Stafford and 10.5 percent for PLUS. Borrowers with Stafford loans would be charged a rate equal to the 10-year Treasury note plus 2.5 percentage points. Those with Parent and Grad PLUS loans would pay two percentage points more.

The House measure now heads to the full House, where it's expected to pass. It's less likely to clear the Democrat-controlled Senate, where the leadership is backing a bill, S 953, that would freeze the student-loan interest rate at 3.4 percent for two years, to give lawmakers more time to craft a long-term solution. That bill faces long odds in the House because it would pay for the extension through a series of tax increases.

'A Little Surprised'

In an interview with reporters before the House committee's session, Representative Kline said he was "disappointed and a little surprised" that the Senate would take a different tack than the president. He said he had spoken with Secretary of Education Arne Duncan and found him "intent on a long-term solution."

Still, a compromise on a permanent solution remains possible. Earlier this month, a pair of Democratic senators, Jack Reed of Rhode Island and Richard J. Durbin of Illinois, joined two Democratic representatives, John F. Tierney of Massachusetts and Joe Courtney of Connecticut, in offering a bill, S 909, that would peg interest rates to another market index.

Under the bill, interest rates would be based on the 91-day Treasury bill plus a percentage, determined by the secretary of education, to cover program-administration and borrower-benefit costs.

To protect borrowers during periods of high interest rates, rates for subsidized loans would be capped at 6.8 percent, while unsubsidized and Parent PLUS loans would be capped at 8.25 percent.