Obama threatens veto of House student loan plan

Budget office: Obama would veto House Republicans' student loan plan

Associated Press

WASHINGTON (AP) -- President Barack Obama on Wednesday threatened to veto legislation by House Republicans that would avert a doubling of student loan interest rates on July 1 but allow them to vary with the markets going forward.

The White House issued the warning a day before the full House was scheduled to vote on the bill. Leaders from both parties expected the legislation to pass the House over the objections by Obama and many fellow Democrats, who argued that the lower rates would give way to higher ones later.

"The bill's changes would impose the largest interest rate increases on low- and middle-income students and families who struggle most to afford a college education," the White House Office of Management and Budget said in a memo announcing the veto threat.

Without congressional action, interest rates on new subsidized Stafford loans are set to double from 3.4 percent to 6.8 percent on July 1. Both parties want to avoid that increase but differ on how to do it.

Democrats sought an extension of the current rates until Congress takes up a higher education bill later. Republicans have rejected that as costly and irresponsible. A two-year extension of the 3.4 percent rate for subsidized Stafford loans would cost taxpayers about $9 billion.

Last week, the GOP-led House Education and the Workforce Committee approved its bill, which would offer some students a better deal at first. Democratic critics at that session warned that graduates would face steadily climbing rates and costs over the long haul if the markets change.

Under the GOP proposal, student loans would be reset every year and based on 10-year Treasury notes, plus an added percentage. For instance, students who receive subsidized or unsubsidized Stafford student loans would pay the Treasury rate, plus 2.5 percentage points.

Rep. John Kline, chairman of the House Education and the Workforce Committee, said lawmakers would vote as scheduled Thursday on the bill despite Obama's threatened veto.

"The president would rather pick a partisan fight with Congress instead of work in good faith on a bipartisan solution," the Minnesota Republican said. "The president's unfortunate position does not alter our intent to advance the bill through the legislative process or our resolve to develop a long-term solution that both the House and the president can support."

Kline said his proposal had many parallels to Obama's own effort and was a starting point for negotiations.

Current subsidized Stafford loans are offered at a fixed 3.4 percent rate and unsubsidized Stafford loans are offered at 6.8 percent. The interest rate on loans to parents and graduate students is 7.9 percent.

Using Congressional Budget Office projections, the GOP plan would translate to a 5 percent interest rate on Stafford loans in 2014, but the rate would climb to 7.7 percent for loans in 2023.

Stafford loan rates would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent ceiling under the GOP proposal.

Democrats object to increasing the rates within a program that generates vast income for the federal government. The Congressional Budget Office last week revised its figures this week, reporting that federal loans will generate almost $51 billion on loans issued this year.

In real dollars, the GOP plan would cost students and families heavily, according to the nonpartisan Congressional Research Service. The office used the CBO projections for Treasury notes' interest rates each year.

Students who max out their subsidized Stafford loans over four years would pay $8,331 in interest payments under the Republican bill, and $3,450 if rates were kept at 3.4 percent. If rates were allowed to double in July, that amount would be $7,284 over the typical 10-year window to repay the maximum $19,000.

For students who borrow the maximum subsidized and unsubsidized Stafford loans, they would pay $12,374 in interest under the Republican bill. The interest charges would be $10,867 if subsidized loans were allowed to double in July, or $7,033 if rates stay the same. The maximum available in subsidized and unsubsidized amounts is $27,000 for four years of school.

Graduate students and parents, meanwhile, would see interest payments reach $27,680 for four years of college under the GOP plan. If Congress keeps the rates the same, their interest payments would be $21,654 on the original maxed-out $40,000 loan, according to the Congressional Research Service report.

Obama included flexible rate student loan rates pegged to 10-year Treasury bills in his budget proposal. The president did not include limits on interest rates but included a smaller added interest rate. His plan also expanded income-based repayment options and loan forgiveness to students.

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