Will Student Loan Interest Rates Double?

NEW YORK (MainStreet)—While a bill introduced last week by recently-elected Senator Elizabeth Warren (D-Mass.) -- her first -- to cut the rates on federal student loans was a make-good on a campaign promise, it is part of a legislative land rush in Congress aimed at fixing rates, coming from both sides of the aisle -- and the White House.

Presidential candidates Mitt Romney and Barack Obama were working the same issue about a year ago, leading to a one-year extension of the 3.4% interest rate on subsidized federal student loans. Students lobbied hard against a scheduled increase, and the Obama administration extended the current rate for an additional year.

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That rate expires on July 1, when it jumps from 3.4% to 6.8%.Republicans in Congress have responded with HR 1911, the Smarter Solutions for Students Act.

"We've got to stop kicking the can down the road with short-term fixes to this interest rate problem," said John Kline (R-Minn.), the Chairman of the House Education and the Workforce Committee, referring to the prospects of another temporary, one-year extension. "The Smarter Solutions for Students Act is a lasting solution that will serve the best interests of students and taxpayers. Our proposal ensures that millions of subsidized Stafford Loan borrowers will not see their interest rates double this July, and other borrowers will actually have their rates reduced." Kline said that politicians would get out of the business of calculating student loan interest rates, a solution also proposed in the Obama administration's Fiscal Year 2014 budget plan.

The House Republican plan would set interest rates for Stafford undergraduate loans at the 10-year Treasury yield plus 2.5 percentage points. Rates would rise with the market, but would be capped at 8.5%. For PLUS loans, where parents sign for student borrowers, the rate is based on 10-year the Treasury yield plus 4.5 percentage points. Stafford loans issued today under the plan would have an interest rate of 4.3%, lower than the current interest rate for unsubsidized student loans but also higher than the current 3.4% interest rate for subsidized loans, where the government pays interest when a student is enrolled in school. The Obama plan links rates to Ten-year Treasuries but with no cap. Rates will rise with the market.