The U.S. House of Representatives approved a Republican proposal to tie interest rates on student loans to the government’s cost of borrowing on May 23, the Washington Post reported. The proposal got through the GOP-led House easily, but faces opposition in the Democratic-controlled Senate, and could be vetoed by the Obama administration if it passes. The bill calls for an end to the current student-loan system, in which rates are fixed by law.
Unless current law is changed, rates for some types of federal loans to needy undergraduates will double from 3.4 percent to 6.8 percent on July 1, the story said.
“Last year, facing a similar rate-doubling deadline during his reelection campaign, President Obama pushed Congress to freeze the 3.4 percent rate for one year. Mitt Romney, his Republican opponent, agreed,” the Washington Post said. “Now there is increasing talk of changing the loan system to avoid politicizing rates.”
The bill would tie new student loan interest rates to the fluctuating yields of the 10-year Treasury note, but would set maximum caps on those variable rates, according to bloomberg.com.
Obama offered a plan similar to the Republican proposal in April, proposing to tie loan interest rates to the yield on the 10-year Treasury bill, rather than setting them as act of Congress, the Washington Post story said.
“Although rates under Obama’s plan would vary from year to year, they would be fixed after students take out a loan. The Republican bill would let rates for individual loans float," it said.
Citing the differences in the Republican proposal and its own, the Obama administration issued a veto threat on the House proposal on May 22, the Washington Post said.
A Wall Street Journal story illustrated how the Republican’s proposed bill could play out for holders of new students loans:
“For Stafford loans, the most widely used, the rate on new loans would be 2.5 percentage points above the 10-year Treasury yield,” the story said. “At current yields, the new rate would be about 4.5%, below the current fixed rate of 6.8%, which was set by Congress and took effect in 2006. The rate on so-called subsidized Stafford loans would be about 4.5%, higher than the current fixed rate of 3.4%.”
Democratic leaders in the Senate support a plan to keep existing rates in place for the next two years, covering the cost by removing tax breaks “for retirement accounts inherited by young beneficiaries, for oil companies and for foreign companies with U.S. subsidiaries," the Wall Street Journal said.
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