House backs variable rate student loans

Chart shows average student loan debt since

WASHINGTON (AP) -- Dismissing a veto threat from President Barack Obama, lawmakers in the House passed legislation that links student loan rates to the ups and downs of the financial markets in a vote largely along party lines.

The Republican-backed bill would allow students to dodge a scheduled rate hike for students with new subsidized Stafford loans next month, but rates could rise in coming years. Democrats largely opposed the measure — which they branded the "Making College More Expensive Act" — while the Republican chairman of the Education Committee labeled the legislation a starting point for negotiations with the Senate and White House.

"The American people sent us here to tackle tough issues, not kick the can down the road. The time to act is now. Students, families and taxpayers cannot afford further delay," House Education and the Workforce Committee Chairman John Kline said after the vote.

Interest rates on new subsidized Stafford loans are set to double, from 3.4 percent to 6.8 percent, on July 1. Lawmakers from both parties say they want to avoid the increase but were divided on how.

Some Democrats are seeking a two-year extension of the current rates until Congress takes up a higher education bill later. Republicans have rejected that proposal — expected to cost taxpayers $9 billion — as costly and irresponsible.

The House measure passed by a vote of 221-198. Eight Republicans and four Democrats broke from their party.

"It kind of goes without saying that you're going to be paying on your student loans for quite a while," said Ron Burruss, who will be a junior at Kentucky's University of Louisville in the autumn.

By some counts, student loan debt has topped $1 trillion and surpasses credit card debt in size. Only mortgage debt is larger.

Under the GOP proposal, student loans would be reset every year, pegged to 10-year Treasury notes with added percentage points. For instance, students who receive subsidized or unsubsidized Stafford student loans would pay the Treasury rate, plus 2.5 percentage points starting for loans issued after July 1.

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 all Stafford loans in 2014, but the rate would climb to 7.7 percent for loans in 2023.

"We're ripping off kids," said Rep. Peter Welch, D-Vt.

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 plan.

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

Even so, many students said they were frustrated by the current rates.

"It's ridiculous that students are being charged 6.8 percent interest, when you can get a mortgage on a house for 3.5 percent," said Zach Nostdal, a 28-year-old graduate student at Seattle's University of Washington.

Jalon Alexander, president of the Penn State Council of Commonwealth Student Governments, said the legislative fight in Congress is also taking place in numerous states.

Alexander, a junior political science major from Philadelphia, said, "$9 billion to extend interest rates at the current level in the long run would be very beneficial. It would save students around the country more money than doubling the rate and potentially making school unfeasible for a lot of individuals."

The House proposal faces a steep climb in the Senate despite some similarities to the White House's offer.

"The Senate is not going to pick this up," said Rep. Caroline McCarthy, D-N.Y.

The Senate planned to take up its own measure after it returns from Memorial Day holiday. Even then, it's not clear lawmakers will be able to reconcile differences between the House and Senate versions before the July 1 deadline.

"We are focused on making college more affordable while they seem focused on making it more expensive," said Sen. Tom Harkin, the Democratic chairman of the Senate Health, Education, Labor and Pensions Committee. "The bill they passed today fails the first test of any policy: do no harm. It's worse for students than if the rate doubles."

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, according to the nonpartisan Congressional Research Services. 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.

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Associated Press writer Bruce Schreiner in Louisville, Ky., Donna Blankinship in Seattle and Genaro Armas in State College, Pa., contributed to this report.

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