Student Loan Rates May Be Rising

Post election, Obama plan for student loans could lead to higher rates.

President Barack Obama waves as he arrives to speak at University of Colorado Boulder, Tuesday, April 24, 2012, in Boulder, Colo. (Carolyn Kaster/AP Photo)

President Barack Obama waves as he arrives to speak at University of Colorado Boulder on April 24, 2012.

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A little more than a year ago, President Barack Obama stood at a podium at the University of Colorado in Boulder, Colo., and promised he'd do everything in his power to keep Stafford loan interest rates from rising above 3.4 percent.

What Obama negotiated was a one-year deal with Congress to keep loans at 3.4 percent. But if the House and the Senate don't act by July 1, the interest rate will double to 6.8 percent. And now with the presidential election in his rearview mirror, Obama seems resigned to the fact rates may have to go up in the name of sustainability. Just how exactly that will happen is still up for debate.

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"This is significantly different from last year. Last year, the issue was being discussed purely in a short-term way," says Tobin Van Ostern, the deputy director of Campus Progress, a progressive student advocacy branch of the Center for American Progress. "And it gained a ground swell of support on both sides because Governor Romney and Obama were pushing for it."

Thursday, the House of Representatives passed the Smarter Solutions for Students Act, a loan reform plan that reduces the federal deficit and would tie student loan interest rates to a market-based rate. The loans would be readjusted every year and depend on Treasury notes plus an added percentage depending on the loan type. Under the plan, the interest rate would be readjusted annually. The House bill also caps Stafford loan rates at 8.5 percent.

The bill, which is popular among House Republicans easily passed along party lines 228 to 198 ,but even before passage the White House announced it was be dead on arrival. The administration and Democrats in Congress say the legislation would keep rates low at first, but eventually student loan interest rates could balloon.

"The bill would not guarantee low rates for today's students. A rate that continues to vary after the loan has already been taken out would create uncertainty," a memo threatening to veto the bill from the White House read. "The changes would impose the largest interest rate increase on low and middle income students and families who struggle most to afford a college education."

On Thursday before the vote, House Speaker John Boehner accused the White House of simply using the issue for political gain instead of addressing the unsustainability of keeping student loan rates frozen.

 

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"What the House is doing is a responsible way to deal honestly with the issue of student loans. Can someone politicize this on the other side of the aisle? Sure they can," Boehner said. "A year ago we just extended the program for a year, but at some point it has to be fixed."

The president has a plan that would tie Stafford loan rate to the Treasury as well. That could lead to rates higher than 3.4 percent. But instead of the loan interest rates being reset on the loan every year, the interest rates would remain constant as long as students had their loans. The president's bill would also keep students from paying student loan bills that were more than 10 percent of their paychecks.

House Democrats have proposed simply extending the 3.4 percent interest rates for two more years, but Republicans say that would cost more than $8 billion and kick the can down the road.

Across the Hill, Sen. Elizabeth Warren, D-Mass., is leading the charge with her solution that would link Stafford loan interest rates to the Fed's discount rates. Warren's solution would significantly lower student loan rates to less than 1 percent in some circumstances. But Warren's legislation would only be a one-year solution.

[READ: What Elizabeth Warren Gets Wrong (and Right) About Student Loans]

With the House's bill passed, the Senate may face more pressure, however, to act.

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