Student loan interest rates to double unless Congress acts

2013-06-09T00:00:00Z 2013-06-11T15:15:39Z Student loan interest rates to double unless Congress actsBy Dan Carden dan.carden@nwi.com, (317) 637-9078 nwitimes.com

INDIANAPOLIS | Next time you're at the grocery store or a RailCats game or anywhere out and about in the region, look around -- almost one of every five adults you see owes money on student loans.

A lot of money.

On average, the 18.3 percent of Hoosiers with student loan debt have a balance of $22,330, according to the Federal Reserve Bank of New York. A smaller proportion of Illinois residents have student loans, 16.7 percent, but on average they owe more: $26,440.

Nationwide, the more than $1 trillion in outstanding student loan debt outpaces credit card, auto loan and all other household debts. Only home mortgage debt is greater.

Without Congressional action by July 1, many Americans refinancing their student loans -- and current college students racking them up -- will see their interest rate jump to 6.8 percent from 3.4 percent.

Republicans and Democrats in the U.S. House and Senate agree they should not allow the interest rate on subsidized Stafford loans to double. A two-year extension of the 3.4 percent rate was included in the 2010 budget deal; it was extended for one more year in 2012.

But so far this year, lawmakers can't decide on how to set a new rate.

Separate Republican and Democratic proposals each failed to win 60 votes needed on procedural votes. The failure means that unless lawmakers can find a rare bipartisan agreement, students are likely to face higher rates on new subsidized Stafford student loans this fall but enjoy greater certainty on the interest they will be expected to pay during the life of their loans.

The Republican plan, approved 221-198 two weeks ago on a nearly party-line vote in the U.S. House but which failed to get 60 votes needed in the Senate, would annually reset the Stafford loan interest rate to the rate of a 10-year Treasury note plus 2.5 percent, with a maximum rate of 8.5 percent for Stafford loans and 10.5 percent for parent loans. U.S. Rep. Pete Visclosky, D-Merrillville, voted no.

The Congressional Budget Office estimates Stafford loan rates would increase under the proposal to 5 percent in 2014, and 7.7 percent in 2023.

U.S. Rep. Todd Rokita, R-Indianapolis, a Munster native whose district includes Newton and Jasper counties, voted for the measure. He called it a long-term solution to the student loan issue.

"The federal government's heavy involvement in student loans has driven up costs and caused great uncertainty for everyone involved. By setting interest rates, the government has engaged in price fixing –- and has done so badly," Rokita said. "This legislation will result in lower rates for many students, while harnessing the power of the free market to create a better, fairer system."

The GOP parameters were not that different from Democratic President Barack Obama's budget proposal, which also included interest rates linked to markets.

However, Obama threatened to veto the House Republican plan if it makes it to his desk. Obama agrees student loan rates should be tied to the federal government's cost to borrow money, but he wants student rates fixed for the life of the loans.

He also believes Americans shouldn't have to spend more than 10 percent of their annual incomes on student loan repayment, a provision not in GOP legislation.

Tara DiJulio, communications director for Indiana U.S. Sen. Dan Coats, R-Indianapolis, said, "Sen. Coats supports the Comprehensive Student Loan Protection Act, which is a permanent solution for 100 percent of federal student loans that would streamline the student loan process and save taxpayer dollars. This type of solution is similar to a proposal supported by the president.

"Unfortunately, Senate Democrats blocked this legislation from passing and instead they are pushing a two-year extension that fails to address all student loans as well as the long-term problems and costs associated with student loan rates."

The Democratic plan, which failed to advance Thursday, would maintain interest rates at 3.4 percent for federal Stafford loans for two years while Congress works on a more comprehensive overhaul.

The legislation did not get the 60 votes it needed to move forward. The vote was 51-46.

The office of Indiana U.S. Sen. Joe Donnelly, D-South Bend, did not return a call from The Times for comment.

U.S. Sen. Elizabeth Warren, D-Mass., also put forward a plan several weeks ago that would reduce student loan interest rates for one year to 0.75 percent -- the same rate banks pay for overnight loans -- while Congress continues to work on the issue.

"If we can invest in big banks by giving them low interest rates on government loans, we certainly can do the same to help students get an education," Warren said in statement following the House vote two weeks ago.

"Our students should not be a profit center for the government, and the July 1 deadline should not be turned into an opportunity to make more money at the expense of young Americans who are working hard to get an education."

Critics of Warren's plan note that unlike Federal Reserve loans to banks, student loan money is borrowed for much longer than one night.

In addition, students also are far more likely to default on their loans. Currently 12.5 percent of Indiana student loan balances are more than 90 days delinquent. In Illinois, 10.1 percent of student loan borrowers are more than three months behind.

House Republicans have said they're committed to their plan, despite the president's veto threat, likely setting up an end-of-June legislative showdown over student loan interest rates -- whose outcome will affect the wallets of almost one out of every five adults you see.

The Associated Press contributed to this report.

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