Student-Loan Rates Set to Double as Fix Eludes Congress

Student-Loan Rates Set to Double as Fix Eludes Congress

It’s increasingly unlikely Congress will act in time to avert a doubling next week of the interest rate that low-income college students pay for subsidized federal education loans, said senators involved in negotiations.

“We probably can’t get anything done this week,” Senator Tom Harkin, an Iowa Democrat and chairman of the Health, Education, Labor & Pensions Committee, told reporters yesterday.Unless Congress acts, the interest rate on new subsidized Stafford loans will double on July 1 to 6.8 percent from 3.4 percent. That means that any agreement would have to be handled retroactively, after the week-long recess scheduled over the July 4 holiday.

About 7 million undergraduates borrow for college using the subsidized loans, for which the government pays the interest while these students are in school. Students must show financial need to qualify for these loans.

The rate for unsubsidized Stafford loans is already at 6.8 percent; those loans are available to any undergraduate, regardless of financial status, and to graduate students who are no longer considered their parents’ dependents. Students with unsubsidized loans pay monthly interest while in school; if they don’t, their interest charges during that time are added to their loan balance. Both subsidized and unsubsidized loans are taken out annually and are based on anticipated costs for the next academic year.

Partisan Disagreements

Democrats and Republicans are divided over whether to cap the interest rate students would pay for consolidating their loans when they graduate. There’s also disagreement over whether money the government makes on the loans should be used to reduce the federal deficit.

A bipartisan group of senators led by North Carolina Republican Richard Burr, West Virginia Democrat Joe Manchin and Maine independent Angus King have been trying to build support for a variable rate tied to the yield of the 10-year Treasury note. Under their proposal, the interest rate for loans taken out after July 1 would be 3.7 percent at today’s rates, said Tennessee Senator Lamar Alexander, the top Republican on Harkin’s committee. That rate would apply to both subsidized and unsubsidized Stafford loans, which are handled by the Education Department.

“The important thing is to get the lower interest rate for 100 percent of the loans and get it into place in July so 11 million students can make their plans for the fall,” said Alexander, who served as president of the University of Tennessee in Knoxville from 1988 to 1991 and as secretary of Education under President George H.W. Bush from 1991 to 1993.

House Position

The House has passed legislation, H.R. 1911, that would peg the loan rate to the 10-year Treasury note plus 2.5 percent and let that rate float. The House plan would apply to subsidized and unsubsidized Stafford loans as well as to Plus loans, which are available to graduate students and to parents of undergraduates. The current Plus loan rate is 7.9 percent.

President Barack Obama has also proposed tying these loans to interest-rate fluctuations, albeit with a different set of limitations — an idea that hasn’t sold well among Senate Democrats. Like the House plan, Obama’s proposal would divert some of the money the government makes on the loans to cutting the deficit.

Senate Democrats “don’t think there should be deficit reduction” on “the backs of young men and women who are trying to go to college,” said Majority Leader Harry Reid.

Reid and his Democratic colleagues tried to pass a two-year extension of the current rates, S. 953. It fell nine votes short of the 60-vote supermajority needed for consideration.

Since House leaders are insisting on market-based rates, “there is no prospect of any sort of short-term political fix,” Alexander said.

To contact the reporters on this story: James Rowley in Washington at jarowley@bloomberg.net; Caitlin Webber in Washington at cwebber4@bloomberg.net