U.S. House Votes to Avert Student Loan Rate Increase

By a vote of 221-198, the U.S. House passed legislation that would reset interest rates on federal student loans and avert a scheduled doubling of rates this summer.

The bill, H.R. 1911, would peg new student-loan interest rates to yields on the 10-year Treasury note, meaning that the rates would fluctuate. It would also set maximum caps on those variable rates.

The proposal faces opposition in the Democratic-controlled Senate, where Majority Leader Harry Reid of Nevada has endorsed a plan that would extend, for two years, the current fixed rate of 3.4 percent for subsidized Stafford loans, which are available to low-income students.

Without congressional action, the interest rate on those loans will double to 6.8 percent on July 1 -- an action that would affect more than 7 million students.

Under current law, Congress sets the rates for student loans. Legislation enacted in 2007 set the interest rate on new subsidized Stafford loans at 3.4 percent. That rate was to expire last year, in the midst of the presidential campaign, and Congress extended it through June 30, 2013.

A report by the Republican staff of the House Education and the Workforce Committee said the bill passed today would stop “politicians from the business of setting student loan interest rates.”

Stafford, Plus

In addition to subsidized Stafford loans, on which interest doesn’t accrue until after a student graduates, the measure would affect rates for unsubsidized Stafford loans, which are available regardless of financial need, and Plus loans, which are available to graduate students and parents of undergraduates. The current rate for unsubsidized Stafford loans is 6.8 percent; for Plus loans, the rate is 7.9 percent.

The bill would set interest rates on both types of Stafford loans at the 10-year Treasury yield -- currently around 2 percent -- plus 2.5 percent.

For Plus loans, 4.5 percent would be added to the 10-year T-note yield. It would set the maximum rate on Stafford loans at 8.5 percent and on Plus loans at 10.5 percent. It also would eliminate the cap on the interest rate of consolidated loans that are originated on or after July 1, 2013; the current cap on the rate for consolidated loans is 8.25 percent.

Veto Threat

The White House opposes the House measure and has threatened a veto, in part because the bill would allow interest rates to fluctuate over a loan’s repayment period. House Speaker John Boehner, an Ohio Republican, called the bill a “responsible fix” and said the House and the Senate would have to iron out their differences in a conference committee.

The sponsor of the House bill, Minnesota Republican Representative John Kline, was pessimistic about the possibility of compromise between the two chambers.

“One approach has almost nothing to do with another,” Kline said in an interview. “Senate Democrats and some Democrats in the House are calling to kick the can down the road for two years so Congress can get together again and have a big political fight.”

Reid has said that “passing the House bill would be worse than doing nothing at all,” reflecting concerns that students could face ballooning financing costs if currently low interest rates return to higher levels.

The Senate Democrats’ bill, S. 953, would finance a freezing of current rates by curbing tax breaks for retirement accounts, the oil industry and foreign companies.

In his 2014 budget request, President Barack Obama also proposed pegging student-loan interest rates to the 10-year Treasury note. Under his plan, rates would be fixed for the life of the loan and wouldn’t be subject to maximum caps.

To contact the reporter on this story: Caitlin Webber in Washington at cwebber4@bloomberg.net

To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net

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