House to Tackle Student-Loan Rates

Last year they were blindsided. This year they are ready. House Republicans are preparing to pass legislation that would remedy, once and for all, the looming problem of student-loan interest rates. The fixed rate for need-based loans of 3.4 percent is set to double on July 1 unless Congress acts.

“We don’t want to go back to this,” said House Education and the Workforce Committee Chairman John Kline, R-Minn., in an interview. “We are trying to get this in place so that we don’t have a knee-jerk reaction” as the July 1 deadline approaches.

Kline’s committee will vote this week on a bill to base interest rates for all new federal student loans on the bond market, using the same 10-year Treasury note benchmark that has been proposed by the Obama administration. The bill is expected to be on the House floor the week before Memorial Day. The legislation would effectively remove the annual need for lawmakers to tinker with the student-loan interest rate that has been set into law without a long-term offset.

Last year, Kline had all but written off the protests from student groups and Democrats that the 3.4 percent interest rate for subsidized student loans was set to expire. But Republican presidential nominee Mitt Romney then surprised everyone by stating on the campaign trail that the rate should not be allowed to double in the middle of an economic downturn. House and Senate leaders were left scrambling to find a solution. They wound up extending the 3.4 percent interest rate for one year, using a series of offsets to make up the additional $6 billion that the patch would cost taxpayers.

“This is a better solution than another patch,” Kline said Thursday of his bill. The measure would reset interest rates for all federal student loans each year based on 10-year Treasury note plus 2.5 percent, capped at 8.5 percent. Graduate student and parents’ loans would be set on the 10-year Treasury note plus 4.5 percent, capped at 10.5 percent. In practical terms, that means the interest rates for subsidized and unsubsidized student loans would be the same, at 4.4 percent, in 2013.

Kline’s bill has the advantage of being similar to proposals offered by the Obama administration and Democrats in both the House and the Senate, all of which would create adjustable-rate loans for students and parents. Kline says he has been in contact with staffers from the Education Department almost every day. He has also spoken with Education Secretary Arne Duncan about his proposal. Everyone is encouraging, but they aren't there yet.

Rep. Joe Courtney, D-Conn., a longtime advocate of affordable student financing, told National Journal Daily that he is pleased with Kline’s bill, but he wants to see the numbers adjusted.

“I like your question that the bill is offered in the spirit of doing something. That’s impressive optimism, but it’s actually true,” Courtney said. “Unlike last year, this committee is trying to be part of this.”

The bill received kudos from Rep. Tom Petri, R-Wis., who has offered a broader measure to tie student-loan repayments to income levels and allow payments to be deducted from paychecks. “I have long supported moving to market-based interest rates for federal student loans, and I think the committee’s proposal is a good one,” he said.

Kline’s bill would make money for the U.S. Treasury—$4 billion over 10 years. The windfall certainly makes it easier to pass on the House floor, but Courtney says the Treasury shouldn’t make money off of student loans. “That’s unacceptable. Student loans already make money for the government.…They shouldn’t be used as a tax,” Courtney said.

Committee ranking member George Miller, D-Calif., was less charitable. He called the measure “another classic bait-and-switch scheme: Lure you in with a short-term lower rate, but then charge you higher rates in the long term.”

Courtney sponsors an alternative that would cap need-based student-loan rates at 6.8 percent and unsubsidized and parent-loan rates at 8.25 percent.

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