Tying Student Loan Rates to Financial Markets

Republicans in control of the House Education and the Workforce Committee voted on Thursday to advance legislation tying student loan interest rates to the financial markets, a plan they said would give borrowers a better sense of how much they must repay.

Currently, interest rates on subsidized Stafford loans are set by the government. The rates are due to double on July 1 to 6.8 percent from 3.4 percent, and while lawmakers across the aisle agree that an increase should be averted, they disagree on how to prevent it.

Republicans on the committee rejected amendments by Democrats to maintain the current rates for another two years.

Under the Republican plan, subsidized and unsubsidized Stafford loans would be recalculated every year and pegged to 10-year Treasury notes, plus 2.5 percentage points.

The bill will now move to the full Republican-controlled House. It is unclear if it will get much traction in the Democrat-led Senate, which is working on an alternative plan to freeze rates at the current 3.4 percent until 2015.

Lawmakers have recently expressed growing concerns about American students' loan debt, which according to the U.S. Consumer Financial Protection Bureau now exceeds $1 trillion. The average student borrower owes about $27,000, and delinquency rates are increasing as new graduates struggle to find jobs.

The bill introduced by Republicans John Kline of Minnesota and Virginia Foxx of North Carolina is similar to a proposal by President Barack Obama in his budget proposal, but includes a 8.5 percent cap on loan rates.

"Student borrowers shouldn't have to ride the roller coaster of political largesse wondering every year whether Congress will intervene in time to adjust their rates," Foxx said.

Democrats on the committee opposed the bill, saying it puts students and families at risk of paying more in the future.

"Our students and families deserve better than this bait-and-switch scheme we're voting on today," said California Representative George Miller, the senior Democrat on the committee.

"A low-income, four-year borrower enrolling in college next year would pay more interest on her student loans under the Republican proposal than she would if we took no action," he said.

The non-partisan Congressional Research Service estimates that under the Republican plan, a student who borrows the maximum amount of subsidized and unsubsidized Stafford loans over five years would pay $14,430 in interest. If rates were allowed to double on July 1, a student would pay $12,598, compared with $7,965 if rates don't double.