NEW YORK (MainStreet)—A bill to reset interest rates on federal student loans for some undergraduates gained in a House vote yesterday to let interest rates charged to some borrowers float--and likely rise--from year to year.
The Republican proposal passed 221 to 198 in a party-line vote. How it will fare in the Senate, where Democrats have a majority, remains to be seen.
Current legislation, which sets rates at 3.4%, is set to expire on July 1. Unless Congress acts, the rate on government subsidized Stafford Loans, currently held by some 7.5 million students, will jump to 6.8% on July 1, a two-fold increase--but opposition is expected.
The House approved a Republican proposal Thursday to allow interest rates on federal student loans to rise or fall from year to year with the government's cost of borrowing, ending a system in which rates are fixed by law. Stafford Loan rates would be tied to the 10-year Treasury note plus 2.5%.
"Who's going to set interest rates," asked Representative John Kline (R-Minn.), "politicians here or the markets?" A proponent of the bill, Kline is chair of the House Committee on Education and the Workforce. There would be a cap in the Republican proposal, however; 8.5% for Stafford loans and 10.5% for graduate students and loans signed by parents.
Senate Democrats want to keep the current rate for at least two years. Senator Kirsten Gilibrand (D-NY) opposes having the market set rates and favors a 4% rate for all student loans.
Apart from the dueling congressional majorities—the Republicans control the House, the Democrats control the Senate—the student loan issue has already been politicized. In the midst of the 2012 election, Obama got Congress to hold the rate at 3.4% for one year—a solution candidate Mitt Romney went along with.
The Obama administration proposal would allow rates to float but would be fixed once a student signed for a loan. The administration has identified the Republican plan to let individual rates rise and fall as the reason for a potential veto. Ironically, the Republican bill is similar to Obama's plan to synch interest rates to the 10-year T-bill, excluding Congress from the decision and letting the markets decide.
In the overall rate climate, a rise to 6.8% would be above many consumer loans. According to government mortgage purchaser Freddie Mac, 30-year fixed mortgages closed yesterday at 3.59%. Home equity loans have been in the 3-4% range. Yesterday's rate for 30-year Treasuries was 3.21%
"I think the current rate is an interesting one," said Ted Beck, president and CEO of the Denver-based National Endowment for Financial Inclusion at last Tuesday's Webinar on student loan debt produced by the Society of American Business Editors and Writers. "If you do not have a subsidized loan, the rate is 6.8%." In the way of a comparison, he noted, "That's 260 basis points higher than the current Spanish ten-year bond," referring to the rate on sovereign debt in a country where there is a significant financial crisis. "But it's also 140 basis points lower than Greece, so I guess there's a little positive news there."
--Written by John Sandman for MainStreet