Lawmakers Propose Long-Term Solutions for Student-Loan Interest Rates

May 10, 2013

Members of Congress introduced two bills on Thursday that propose long-term fixes to keep student-loan interest rates affordable, even as some legislators pushed to extend the current low rates.

Some Democratic lawmakers previously said they favored extending the current rates in hopes of giving Congress more time to develop a sustainable solution. But with less than two months remaining before rates are set to double on federally subsidized Stafford loans, calls have mounted for an overhaul of the student-loan system. Unless Congress acts by July 1, interest rates will increase from 3.4 percent to 6.8 percent.

One bill—introduced on Thursday by two Democratic senators (Jack Reed of Rhode Island and Richard J. Durbin of Illinois) and two Democratic representatives (John F. Tierney of Massachusetts and Joe Courtney of Connecticut)—would set interest rates based in part on the cost of operating student-loan programs.

Under the bill, S 909, rates would be set annually, 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.

"Student loans are about helping middle-class kids get the education they need," said Mr. Reed in a written statement. "They shouldn't see their rates skyrocket."

Mr. Courtney also introduced legislation last month, HR 1595, that would postpone the interest-rate increase for two years. He said in a written statement that Congress should first focus on "defusing the July 1 trigger" that would double interest rates, and only then pursue a long-term solution.

Switch to Market-Based Rates

Another bill, introduced on Thursday by two House Republican leaders—John P. Kline Jr. of Minnesota and Virginia Foxx of North Carolina—would switch to a market-based rate that would be set annually, similar to what President Obama proposed in his 2014 budget. Mr. Kline is chairman of the House education committee, and Ms. Foxx leads its higher-education subcommittee.

Under their bill, HR 1911, 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. Additionally, rates on Stafford loans—both subsidized and unsubsidized—could not rise above 8.5 percent, while Parent and Grad PLUS loans would be capped at 10.5 percent.

Ms. Foxx said in a written statement that House Republicans hoped to work with Democrats to build on this bill and develop a "simplified, market-based plan" before the July 1 deadline.

"Students need more certainty and less confusion about their federal loan interest rates," Ms. Foxx said.

Runaway Rates?

In his 2014 budget President Obama proposed switching to a market-based rate in which interest rates would be set annually and fixed for the duration of the loan. But some experts and student-advocacy groups criticized Mr. Obama's plan because it would not place a cap on interest rates, a deficiency that some fear would allow for runaway interest rates.

Rep. George Miller of California, the senior Democrat on the education committee, said in a written statement that the Republican bill was a "bait-and-switch scheme." Because interest rates would not be fixed for the duration of each loan, as they would be under Mr. Obama's plan, borrowers could end up paying more because the rates would be higher by the time they were in repayment.

Under the Republican proposal, Mr. Miller said, "the interest rate for a low-income freshman entering college next year will be higher when they graduate than it would be under current law," even if the rates were to double this summer.

"Students and families need low rates now and into the future," Mr. Miller said.

'The Heart of the Matter'

Advocacy groups for students said they still hoped for an extension of the current rates, to give lawmakers more time to develop a comprehensive solution.

Christine Lindstrom, director of the higher-education program for the U.S. Public Interest Research Group, said an extension would allow legislators and advocacy groups to "have a conversation and be thoughtful about it."

Ms. Lindstrom said the competing Republican and Democratic bills indicated a lack of agreement that is unlikely to be reversed by July 1.

But another bill introduced this week, by Sen. Elizabeth Warren, Democrat of Massachusetts, "gets right to the heart of the matter," Ms. Lindstrom said.

Ms. Warren's bill, S 897, would give short-term relief to borrowers and help reduce student-loan debt by allowing students to pay the same interest rate on their loans as banks do, for one year. Banks can borrow from the Federal Reserve at an interest rate of less than 1 percent, Ms. Warren said in a speech on the Senate floor.

"Some people say that we can't afford to help our kids through school by keeping student-loan interest rates low," Ms. Warren said in her remarks. "But right now, as I speak, the federal government offers far lower interest rates on loans, every single day—they just don't do it for everyone."