WASHINGTON (USATODAY.com) - Seven million college students are on track to see their federal loan rates double this year unless Congress acts ahead of a July 1 deadline when subsidized Stafford loan rates will increase from 3.4% to 6.8%.
The U.S. House will vote Thursday on a Republican plan to head off the increase inspired by an unlikely source: President Obama.
"No one wants to see student loan interest rates double on July 1. The president put forth a plan in his budget to address the problem with a market-based solution, and my Republican colleagues and I worked in good faith to offer a proposal that largely mirrors the president's," said House Education and Workforce Chairman John Kline, R-Minn.
In his 2014 budget, the president called for tying college loan rates determined by the federal government to market-based interest rates, which is the foundation of a GOP proposal.
But that is where the similarities stop, and the partisan divides begin to emerge.
The House Republicans' proposal would tie loan rates to the interest rate on a 10-year Treasury note, plus 2.5%, with a cap that would prevent the interest rate on Stafford loans from rising above 8.5%. Obama's proposal would have set the rate at slightly less than 1% above the Treasury note rate. The GOP plan would also reset the loan rate for all borrowers every year based on market fluctuations, while under Obama's proposal, any borrower's initial loan rate would remain fixed for the life of the loan.
Republicans say market-based loan rates will take Washington politics out of the interest-rate equation, while Democrats compare the plan to predatory adjustable rate mortgage practices that helped fuel the housing collapse during the financial crisis.
The White House issued a veto threat in a statement on Wednesday because the variable rate "would create uncertainty and lessen transparency for students and their families who are making decisions about borrowing for college." It also does not include more flexible repayment proposals sought by the president.
Kline said the veto threat "proves the president would rather pick a partisan fight with Congress instead of work in good faith on a bipartisan solution," and added that it would not deter the House from approving the measure on Thursday.
Congressional Democrats instead are calling for a two-year extension of the current rate in order to allow lawmakers time to find a long-term fix when they renew the Higher Education Act.
If the current rate expires, the immediate increase will be sharp, but it would return student loan interest rates to pre-2008 levels - and the original intent of the law.
When Democrats controlled Congress in 2007, they passed a law as part of their economic stimulus efforts to gradually lower the 6.8% fixed interest rate and then slowly let it rebound over a four-year period. Last year, Congress passed another extension of the lowered 3.4% rate because the economy is still recovering. It also became part of the presidential debate, which pressured Congress to ultimately act. Obama campaigned against Republicans on loan rates in stops on college campuses as part of a broader effort to appeal to youth voters.
Some leading Democrats have argued that doing nothing and allowing the rates to resume is better than passing the House GOP proposal, citing a recent report by the non-partisan Congressional Budget Office.
The CBO examined the cost effect on students of three scenarios: the GOP proposal to tie rates to the market; the Democratic proposal to extend current rates for two years; and current law, which would return to the 6.8% rate. The GOP proposal would result in slightly higher monthly repayments, by about $50, than if Congress allows the rate to return to 6.8% this summer, the CBO concluded.
"Passing the House proposal would be worse than doing nothing at all," Senate Majority Leader Harry Reid, D-Nev., said Wednesday. The Senate has not yet scheduled a vote on student loans.
Despite the impasse over college loan rates, there is growing bipartisan concern about the impact of college debt. Through 2012, the aggregate federal student loan balance was nearly $1 trillion, and the average college student graduates with $26,000 in loans. According to the Federal Reserve Bank of New York, student debt is the second-largest debt in U.S. households, after mortgages.