Student loans: Could GOP, White House strike a compromise on interest rates?

It’s déjà vu time for college students who are wondering what the interest rates on their federal loans will be for the coming year. For many, there’s a good chance the rates will end up being lower, at least in the short term.

In 2012, Congress managed to stave off a scheduled doubling of the interest rate on subsidized Stafford loans, for one year. But that represented only a small portion of student loans. Now, as the July 1 deadline approaches again, there’s a growing desire – both in Washington and among college-access groups – to come up with a longer-term plan that takes loan rates out of the realm of yearly political wrangling in Washington.

The Obama administration, House Republicans, and Senate Republicans have all proposed tying student loans to the interest rate the government pays in the market through the 10-year treasury note. Currently, the loans have fixed rates.

It could be a rare opportunity for compromise between the White House and Republicans on the Hill. Rep. John Kline (R) of Minnesota, chairman of the House Education and the Workforce Committee, touted his Smarter Solutions for Students Act Thursday as a plan based on the one the president incorporated into his budget proposal in April.

But the proposals have differences, and Senate Democrats have come up with some of their own ideas, leading to a complex landscape that may be tough to wade through in less than two months.

Here are some of the key elements up for debate:

• How “variable” should the rates be? The Obama administration (which the Senate Republican bill closely resembles) would set the rate anew each year, but for the borrower that rate would then be fixed. Representative Kline’s proposal would vary the rate of the loan yearly for the life of the loan.
• How many different loan types should there be? Currently, the three major programs are subsidized Stafford loans, at 3.4 percent; unsubsidized Stafford loans, at 6.8 percent; and PLUS loans for parents, at 7.9 percent. Under Kline’s proposal, the unsubsidized and subsidized programs would be combined at a rate of the 10-year treasury plus 2.5 percentage points; PLUS loans would tack on 4.5 percentage points to the treasury. President Obama’s plan would keep the three loans separate, tacking on 0.93 percentage points, 2.93, and 3.93, respectively. (For more comparison of the plans, see Inside Higher Ed.)
• Should the rates have a cap? Kline’s bill would cap Stafford at 8.5 percent and PLUS at 10.5 percent. Mr. Obama’s proposal doesn’t include caps, because the administration argues that makes loans more expensive – and students have repayment options that cap their monthly payment in relation to their income and that eventually forgive remaining debt.

The move away from Congress “arbitrarily” setting student interest rates is welcome, but “both the House proposal and the administration’s proposal miss the mark,” says Pauline Abernathy, vice president of The Institute for College Access & Success (TICAS) in Washington.

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