Student Loan Bill Gains in the House, Faces Showdown in the Senate

NEW YORK (MainStreet)—A bill to reset interest rates on federal student loans for some undergraduates gained in a House vote yesterday to let interest rates charged to some borrowers float--and likely rise--from year to year.

The Republican proposal passed 221 to 198 in a party-line vote. How it will fare in the Senate, where Democrats have a majority, remains to be seen.

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Current legislation, which sets rates at 3.4%, is set to expire on July 1. Unless Congress acts, the rate on government subsidized Stafford Loans, currently held by some 7.5 million students, will jump to 6.8% on July 1, a two-fold increase--but opposition is expected.

The House approved a Republican proposal Thursday to allow interest rates on federal student loans to rise or fall from year to year with the government's cost of borrowing, ending a system in which rates are fixed by law. Stafford Loan rates would be tied to the 10-year Treasury note plus 2.5%.

"Who's going to set interest rates," asked Representative John Kline (R-Minn.), "politicians here or the markets?" A proponent of the bill, Kline is chair of the House Committee on Education and the Workforce. There would be a cap in the Republican proposal, however; 8.5% for Stafford loans and 10.5% for graduate students and loans signed by parents.

Also see: Young Student Loan Borrowers Are Bagging the Home Mortgage and Auto Markets

Senate Democrats want to keep the current rate for at least two years. Senator Kirsten Gilibrand (D-NY) opposes having the market set rates and favors a 4% rate for all student loans.

Apart from the dueling congressional majorities—the Republicans control the House, the Democrats control the Senate—the student loan issue has already been politicized. In the midst of the 2012 election, Obama got Congress to hold the rate at 3.4% for one year—a solution candidate Mitt Romney went along with.