WASHINGTON – The days of fixed-rate student loans could be coming to a close, with House Republicans on Thursday advancing a proposal that would link rates to financial markets.
The GOP-led House Education and the Workforce Committee sent to the full House a bill that would offer some students a better deal at first. Democratic critics warned that graduates would face steadily climbing rates and costs over the long haul if the markets change.
“Our families deserve better than this bait and switch,” said Rep. George Miller of California, the senior Democrat on the committee, who led the opposition.
The Republican chairman of the panel, Rep. John Kline, said critics were giving too much credence to Congressional Budget Office figures that anticipate future interest rates and don’t accurately measure real costs for the program that helps 36 million students.
“We don’t know what these interest rates are going to be. No one actually knows what they will be,” Kline said. “Pick your score and make your best guess.”
Without Congress’ action, interest rates for new subsidized Stafford student loans would double from 3.4 percent to 6.8 percent July 1. Neither party wants that to happen, although there remain strong differences in the methods to dodge that.
Democrats attempted to hold the rates at 3.4 percent while Congress considers a long-term fix. Their proposal received no votes from Republicans who hold the majority on the panel.
“Student loan rates should not be subject to the whims of Congress,” said Rep. Virginia Foxx, R-N.C. “Students’ families and taxpayers deserve a long-term solution. ... This legislation offers predictability and simplicity.”
Democrats were not swayed.
“I’ll tell you what’s predictable: They’ll be paying more,” said Rep. John Tierney, D-Mass.
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.
Using Congressional Budget Office projections, that 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.
“These rates reset every year. Buyer, beware,” Courtney said.
Democrats on the panel objected to increasing the rates within a program that generates vast income for the federal government. The Congressional Budget Office this week revised its figures this week, reporting that federal loans will generate almost $51 billion this year. Over the last five years, that sum is almost $120 billion.
“That $51 billion is more than Exxon,” Miller said.
“It’s time we stop using federal student loans as a profit center,” added Rep. John Tierney, D-Mass.
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.
Republicans, however, stood by the proposal as needed amid economic struggles. A two-year extension of the 3.4 percent rate for subsidized Stafford loans would cost taxpayers about $9 billion.
“I would love to have the rates at 2 percent. It’s just not realistic,” said Rep. Phil Roe, R-Tenn.
President Barack Obama’s budget outline included flexible rates for student loans, pegging the interest to markets, but did not have a cap. Republicans had long pushed for the flexible rates and Kline said he would go along with Obama on that principle while adding a cap that Democrats sought.
The White House, however, has not embraced Kline’s proposal and stressed there are serious differences between proposals.