House Republicans released a bill last week to prevent student loan interest rates from doubling by permanently setting them according to the markets. The idea was initially put out by President Obama’s 2014 budget proposal.
The bill, known as the Smarter Solutions for Students Act, would include all federal loans, except the Perkins Loan, and cap the rates — currently at 3.4 percent — to keep them from reaching 8.5 percent. According to House Education and Workforce Committee Chairman John Kline (R-Minn.), who introduced the bill, It could save borrowers up to $1,000 per year.
Interest rates under this bill would be 4.4 percent later this year and could reach up to 7.8 percent in the next 10 years based on the markets, stopping rates from doubling. Kline said that “a rate based on prevailing market rates, plus a cap, would help stabilize federal loan programs and still allow students to take advantage of lower rates when they are available.”
According to the Consumer Financial Protection Bureau, as of the 2012 fiscal year, there were approximately 38 million student loan borrowers with over $1.1 trillion in outstanding debt. The average borrower has an outstanding balance of over $26,000.
Kline also said borrowers should no longer have to fear drastic changes in rates each year based on politics.
“It’s time to move away from a system that allows Washington politicians to use student loan interest rates as bargaining chips, creating uncertainty and confusion for borrowers,” Kline said in a statement to the committee.
The current interest rates, negotiated annually by Congress, have been stable since 2007. Congress could not reach an agreement last year and instead postponed the current rate until it is set to expire this year on July 1.
“Maintaining the current 3.4-percent rate is expensive. It cost the government $6 billion just last year,” Kline’s spokeswoman Alexandra Sollberger said. “So you’re giving students a break, but who pays for it?”
Massachusetts Institute of Technology finance professor Deborah Lucas echoed Kline’s concerns in a committee hearing.
“[The] volatility makes it more difficult for prospective students to assess the affordability of pursuing a higher education,” Lucas said.
Several House Democrats, including Karen Bass of Los Angeles, openly opposed Kline’s bill, believing it to be unstable because rates will continue to change according to the market.
Bass introduced her own version that forgoes annual negotiations, permanently maintains the current interest rate at 3.4 percent and prevents interest from accruing for unemployed jobseekers. Her spokesman Kevin Harris criticized Kline and the GOP for giving the impression that their bill protects borrowers. He highlighted that the GOP is not in favor of maintaining the current rate.
“If we can allow big banks to borrow at less than 1 percent, then we can do better for our students than what the Kline bill calls for,” Harris wrote. “[Kline’s bill] is to essentially provide borrowers with no stability in how much interest they would have to pay from year to year.”
Harris said that the government is estimated to collect $34 billion next year from student loan debt and should use that money to invest in students by offering low rates. He cited the Consumer Financial Protection Bureau’s warning that student debt will hamper the economy in the long term by preventing students from purchasing homes, starting businesses or making investments.
On the other side of Congress, Sen. Elizabeth Warren (D-Mass.) introduced a bill last Wednesday that proposed to cut the student loan rate for one year to 0.75 percent, the rate that big banks get. Warren discredited notions that low rates are too expensive for the government, claiming that it instead chooses to offer low rates to only a select few.
“The biggest banks in the country — the ones that wrecked our economy and cost millions of Americans their jobs — pay next to nothing on their debt, while students pay nine times as much,” Warren wrote in a statement.
