House Proposes ‘Simple’ Solution to Student Loan Rate-Hike

House Republicans have introduced legislation they say will address the growing amount of student debt in America by tethering interest rates on federal student loans to financial markets.

Led by Rep. John Kline (R-MN), who chairs the House Education and Workforce Committee, the legislation would allow interest rates to fluctuate based on economic factors, which opponents say could subject borrowers to changes in the market that could be disastrous over time.

"Our families deserve better than this bait-and-switch," Rep. George Miller (D-CA) said, pushing back on the bill.

The bill would "base interest rates for all new federal student loans on the bond market, using the same 10-year Treasury note benchmark that has been proposed by the Obama administration."  If the bond market fluctuates, the bill could turn a greater profit from Stafford loans than the program already makes—meaning borrowers would pay more.

Federal student loan programs already make billions of dollars in profit each year for the United States government. This year, the Obama administration is expected reap $51 billion in profit from student loan borrowers.

"When I went to a state flagship university with government funding for my tuition, I felt valued by my government," Rep. Susan David (D-CA) said during a hearing on the bill. "I don't think our students will feel that way with this bill."

President Obama's budget also included a change to Stafford that would tie rates to the market; however, Obama's budget did not include a cap to prevent rates from soaring too high. The House Republican plan does have a ceiling for the subsidized Stafford loan rate: 8.5 percent. Parent and graduate student loans would be capped at 10.5 percent.

However, the cap may be too high for many students and families.

Using the Congressional Budgetary Office projections for Treasury notes' interest rates each year, the nonpartisan Congressional Research Service found that students who max out their subsidized Stafford loans over four years would pay:

• $8,331 in interest under the House/Kline plan
• $7,284 if rates are allowed to double on July 1
• $3,450 if rates stay the sameover the typical 10 year window to pay the maximum $19,000

Students who rely on both subsidized and unsubsidized Stafford loans to finance their education would also see a hike in interest payments with the House Republican plan. If subsidized Stafford interest rates double to match their unsubsidized counterpart, this is how they'd be impacted:

• $12,374 in interest under the House/Kline plan
• $10,867 if subsidized loans were allowed to double on July 1
• $7,033 if rates stay the same over the typical 10 year window to play the maximum $27,000 for four years of school.

In support of the bill, Rep. Virginia Foxx (R-NC) said: "Student loan rates should not be subject to the whims of Congress. Students' families and taxpayers deserve a long-term solution. … This legislation offers predictability and simplicity."

Foxx is the same representative who said last year that she had "little tolerance" for Americans who graduate with thousands of dollars of student loan debt.

Some Senate Democrats want to prevent the interest rate on Stafford from doubling—keeping it at the current 3.4 percent—until a long-term solution can be reached. A more radical approach, proposed by Sen. Elizabeth Warren (D-MA), would give students the "same deal" on Stafford interest rates that big banks get from the Federal Reserve.

Emma Weinstein Levey is a reporter at Campus Progress.Follow her on Twitter @ebwlevey.  

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• stafford loans
• student debt
• house republicans
• Kline