Washington Update

Voices Unite for Changing How Interest Rates are Set on Federal Student Loans

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On July 1, 2013, the rate on one type of student loan will double to 6.8%, unless Congress takes action. Congress already postponed the rate increase once, in the midst of the 2012 campaign season. Now, with the one-year reprieve about to expire on subsidized Stafford loans to undergraduates, some interest groups and members of Congress are calling for changes in how the rates on all types of federal student loans are set, in order to better align them with the government’s cost of borrowing.

President Obama’s FY 2014 budget request includes a proposal for setting interest rates on newly issued federal student loans. Rates would be fixed for the life of the loan and set at a rate equal to the interest rate on 10-year Treasury notes plus 2.93% for Unsubsidized Stafford loans. Subsidized Stafford loans would be set at the 10-year Treasury rate plus 0.93%, and PLUS loans for parents of undergraduates and for graduate students set at 10-year Treasury plus 3.93%. The rate would not be subject to a nominal cap.

Last month, the U.S. House of Representatives’ education committee held a hearing that focused on a plan, proposed by the New America Foundation, to switch to a rate pegged to the 10-year Treasury note. Some Democrats favor extending the current rate on the subsidized loans. Rep. Karen Bass (D-CA) has offered a bill, the Student Loan Fairness Act, which would permanently cap the interest rate on all federal loans at 3.4%. Senate Democrats propose to extend the 3.4% rate on subsidized loans indefinitely, though their budget does not include money for the plan.

Given the complexity of dealing with this politically charged issue, there is a good chance Congress will put off doing anything until the reauthorization of the Higher Education Act, expected to begin next year.

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