House Republicans borrow from Obama for legislation to fix student loan rates

House Republicans on Thursday proposed a permanent fix for avoiding a doubling of student loan interest rates this year, one that is based on a proposal from the Obama administration.

{mosads}The Smarter Solutions for Students Act, H.R. 1911, would require interest rates for all federal student loans to be based on the 10-year Treasury note and end what has become an annual debate within Congress on how to set the rates.

Student loan rates have been a problem for the last few years after Congress cut them in half in 2007, from 6.8 percent to 3.4 percent. That lower rate has been extended until this summer, but required a “pay-for” to account for the cost of the extension.

Under the bill introduced by House Education and the Workforce Committee Chairman John Kline (R-Minn.), rates would likely rise slightly, possibly to 5 percent in the next two years. But Kline’s bill would cap those rates at 8.5 percent.

His bill would be deemed to have no budgetary effect, and would provide a permanent solution to the problem, something both Republicans and Democrats have sought.

“As I’ve said time and again, we’ve got to stop kicking the can down the road with short-term fixes to this interest rate problem,” Kline said Thursday. “Our proposal ensures millions of subsidized Stafford Loan borrowers will not see their interest rates double this July, and other borrowers will actually have their rates reduced.”

Kline introduced his bill with subcommittee on Higher Education and Workforce Training Chairwoman Virginia Foxx (R-N.C.). Just last week, GOP leaders said Kline would soon introduce a bill, and Congress would consider it shortly as a way to fix the problem.

“In the near-term this is expected to provide an interest rate lower than the 6.8 percent fixed in law and over the long-term provide savings for taxpayers,” Majority Leader Eric Cantor (R-Va.) said in a memo to Republicans last week. “This bill takes congress and politics out of setting interest rates and provides a long-term fix to the interest rate cliffs initiated in 2007.”

Specifically, the bill would set subsidized and non-subsidized student loan rates at an amount equal to the rate of the 10-year Treasury note, plus 2.5 percent.

Obama’s proposal was similar, as it also based loan rates on the 10-year note. However, Obama did not propose the 8.5 percent rate cap that is in Kline’s bill.

With the 10-year note expected to be about 1.9 percent this year, that would mean a rate of 4.4 percent for student loans under Kline’s bill, compared to the current 3.4 percent.

Rates are expected to rise over the next five years, and by 2017, the 10-year note is expected to rise to 4.9 percent. That would mean the final rate is 7.4 percent, above the original rate of 6.8 percent.

But Kline said a rate based on prevailing market rates, plus a cap, would help stabilize federal loan programs and still allow students to take advantage of lower rates when they are available. He also noted that President Obama proposed a similar mechanism in his 2014 budget proposal.

Federal loans to graduate students and parents would be set at a rate equaling the 10-year note, plus 4.5 percent.