Thursday, May 28

Future of student loan interest rates is uncertain with passage of House bill

The fate of federal student loan interest rates is up in the air after the Republican-majority House of Representatives passed a bill Thursday that would tie interest rates to market-based rates.

The bill is the House’s solution for subsidized federal student loan interest rates, which are set to double to 6.8 percent on July 1 without congressional action. But the bill is unlikely to survive in its current form. It faces a tough path through the Democrat-majority Senate, and President Barack Obama has threatened to veto the bill since it would not guarantee low interest rates for students, according to a statement from the White House.

Whether the bill will be vetoed or changed is largely uncertain, said Gary Orfield, professor of education and political science.

“(The outcome) depends on how much attention this (issue) gets and whether political pressure gets on Congress to respond to student needs,” Orfield said.

About 7 million students currently pay a 3.4 percent interest rate on their federal student loans. They would have to pay double the interest if Congress fails to take action. Under the House bill, interest rates for the federal student loans, called Stafford loans, made on or after July 1 would be determined by the interest rates of 10-year Treasury notes, which change each year with the economy. Federal loans for parents and graduate students would also follow similar regulations.

If the House bill remains intact, federal student loan interest rates are expected to increase in the coming years, according to the Congressional Budget Office.

In a statement released after the House’s passage of the bill, Speaker of the House and Republican John Boehner said the policy would make the loan process fairer in tying interest rates to the market, rather than having Congress set the rates arbitrarily.

If the bill survives the Senate and the president’s veto pen, projected subsidized and unsubsidized federal Stafford loan interest rates would be 4.6 percent starting on July 1. Parents and graduate students would pay 6.6 percent. Under the legislation, federal Stafford loan rates would not be allowed to rise above 8.5 percent for students and 10.5 percent for parents and graduate students.

Christie Fanous, a first-year biochemistry student, said she doesn’t think it’s fair to make students who need the loans responsible for an extra cost.

“We’re getting the loans for a reason,” Fanous said. “I don’t think we have the money to pay (higher) interest rates.”

The House bill would lower the deficit by $3.7 billion over the next 10 years as fewer students will use federal loans because of the higher interest rates, according to the Congressional Budget Office.

The University of California does not support the House bill, said Carolyn Henrich, legislative director at the UC Office of the President. While the bill would save about $4 billion for the federal government, it would come at the cost of students, she said. The fact that interest rates would change over the life of a loan would make college planning difficult for students and their families, she added.

“We’re not opposed to a variable rate necessarily, but we just think there has to be better protection for students,” Henrich said.

Several government leaders have competing solutions to the interest rate dilemma that they hope to push into law. Democratic Senators Tom Harkin and Jack Reed proposed to extend the current Stafford subsidized rate for at least two more years at a cost of $8.3 billion for the federal government, which the senators said would be paid for by closing tax loopholes.

Obama’s proposal would also peg interest rates to the market, but rates would remain fixed for the duration of the loan. His proposal would cap the costs of a federal loan, including interest, at 10 percent of a student’s income.

Congress has managed to bargain last-minute bipartisan compromises in the past. Last year, Congress passed a measure to extend the lower 3.4 percent interest rate on student loans for another year, two days before they were set to double.

But 2012 was an election year, when approving an extension of low student loan interest rates would boost student voter support, Orfield said. That same motivation to keep interest rates lower for students isn’t present this time, he added.

“Right now there’s just such a polarization,” Orfield said. “There’s little ability to compromise against party lines.”

Contributing reports by Christopher Hurley, Bruin contributor.

Comments are supposed to create a forum for thoughtful, respectful community discussion. Please be nice. View our full comments policy here.