Federal update: No agreement on student loan fix

With the July 4 recess approaching, the US House and Senate continue to be at a standstill about the best way to deal with student loan interest rates.  The rate for subsidized Stafford student loans is scheduled to increase from 3.4 percent to 6.8 percent on July 1. There are several proposals but none that have the support necessary to get approval in both chambers.

The House approved its bill on May 23, but the Senate took up and failed to approve two competing measures on June 6, one offered by the Senate Democratic leadership, the other by Senate Republicans. 

House and Senate Republicans want a long-term fix to student loan interest rates, with rates pegged to the 10-year Treasury bond rate (H.R. 1911, S. 1003).  Senate Democrats want to retain the current 3.4-percent rate for two years, paid for by ending certain non-education tax benefits (S. 953). Their goal is to negotiate a longer-term fix as part of the reauthorization of the Higher Education Act. 

The Obama Administration issued a veto threat against the House bill on May 22, although the bill has many similarities to the proposal the Administration included in its FY14 budget.  The White House endorsed Senate Democrats’ bill on June 6.   

The House-passed Smarter Solutions for Students Act (H.R. 1911) would create a single interest rate for both subsidized and unsubsidized loans, with the rate set each year by adding 2.5 percent to the 10-year Treasury bond rate.  The interest rate on PLUS loans would be set by adding 4.5 percent to the 10-year Treasury bond rate.  Interest rates would be capped at 8.5 percent and 10.5 percent, respectively. The Senate Republican bill (S. 1003) is similar, but would set a uniform loan rate for all newly issued subsidized Stafford loans and PLUS loans at the 10-year Treasury bond rate plus three percent.  The House bill would reset the rate for each loan every year, while the Senate Republicans’ bill would hold the rate constant for the life of the loan.  The Senate bill does not include a rate cap. 

Senate Democrats’ alternative, the Student Loan Affordability Act of 2013 (S. 953), would maintain the student loan interest rate on subsidized loans at 3.4 percent for two years using non-education related offsets.  The proposed offsets are: limiting the use of tax-deferred retirement accounts as an estate planning tool, eliminating a corporate offshore tax benefit, and treating oil from tar sands the same as other petroleum products for tax purposes. 

The President’s plan would set subsidized student loans rates at the 10-year Treasury bond rate plus .93 percent.  Borrowers with unsubsidized loans would be charged the 10-year Treasury bond rate plus two percentage points, while those with PLUS loans would be charged the 10-year Treasury bond rate plus three percentage points.  Unlike the House bill, the President’s proposal would hold the rate constant for the life of a loan, does not include a cap on interest rates, and includes an income-based repayment plan. 

House Democrats are now attempting to force a floor vote on a two-year extension of the current interest rate for federally subsidized student loans through the use of a discharge petition.  The approach requires the support of a majority of House members. This would force a vote on a HR 1595 that would freeze the current 3.4 percent interest rate on the subsidized portion of Stafford loans for two years while Congress negotiates a permanent solution. It’s similar to a Senate bill (S 953) that last week fell short of the 60-vote threshold needed for an up-or-down floor vote in that chamber.