The current rate on federal loans is 3.4 percent; that would double on July 1 without action from Congress. House Republicans approved a plan to halt the increase last week that would tie student loan rates to interest rates on 10-year Treasury bonds, which are currently at 2.5 percent and expected to rise above 5 percent over the next five years as the economy improves. Obama’s plan is similar in that it would also tie rates to Treasury notes.
But the White House has threatened to veto the House plan over a major difference between the two plans. Obama’s proposal would apply fixed rates to student loans, so that a borrower was guaranteed the interest rate he or she agreed to when the loan was originated. The House plan, however, would cap rates at 8.5 percent but would not fix them, meaning borrowers would be subject to varying rates over the life of the loan.
Under the House plan, a student who took out the maximum amount of federal loans would pay $14,430 in interest, nearly $2,000 more than they would pay if rates doubled as scheduled and twice what they would pay under current rates. “The bill’s changes would impose the largest interest rate increases on low- and middle-income students and families who struggle most to afford a college education,” the White House said in issuing the veto threat last week.
Sens. Kirsten Gillibrand (D-NY) and Elizabeth Warren (D-MA) have introduced other proposals for dealing with interest rates on student loans. Gillibrand’s legislation would force the Dept. of Education to refinance any student loan with an interest rate above 4 percent to a fixed 4 percent loan, a plan the Center for American Progress estimates would save borrowers $14.5 billion in the first year alone. Warren’s plan would tie student loan rates to those received by large banks, which access federal loans at miniscule interest rates. The Consumer Financial Protection Bureau is also exploring ways to reduce the burden of student debt on borrowers.
Americans now hold more than $1 trillion in student loan debt, and they defaulted on those loans in record numbers during the first three months of 2013. The amount of debt is holding back the economy, as young borrowers are struggling to afford mortgages and other loans as they pay for the cost of education.