House passes market-based student loan bill: Is it a step toward a solution?

Congress took the first step toward making sure student loans aren’t another victim of Capitol Hill’s 11th-hour brinkmanship on Thursday as the House passed a proposed fix for federally subsidized college loans whose interest rates are set to double come July 1.

The bill, which would peg interest rates for student loans to the 10-year Treasury bond rate, passed 221-198, with four Democrats joining all but eight House Republicans in supporting the measure.

Despite the starkly partisan vote and a White House promise to veto the bill, the House Education and Workforce Committee chairman, Rep. John Kline (R) of Minnesota, argued that the vote helped move Congress toward resolving the issue rather than coming to a stand-off later this summer.

“President Obama asked for a long-term, market-based solution and that is precisely what we have delivered. It is now up to the Senate to move forward with its own ideas to solve the problem, so we can come together and send a bill to the president,” Representative Klein said in a statement, referencing Mr. Obama’s own student loan plan that resembles the House GOP proposal in some ways.

Senate Majority Leader Harry Reid (D) of Nevada has said his chamber will handle similar legislation in the near future, although its prospects for landing on the Senate floor are clouded somewhat by the need to pass a farm bill and immigration legislation in June.

Kline’s legislation would add 2.5 percent to the government’s rate of borrowing over 10 years for undergraduate loans and 4.5 percent to the same rate for loans taken out by parents or used to fund graduate education. Undergraduate loans would be capped at 8.5 percent, while other loans would go no higher than 10.5 percent.

Today, that would give students a rate slightly below the 3.4 percent the government currently offers but would likely rise well above that level as the economy expands.

While the rate will vary from year to year, students will be able to consolidate their loans into a single package upon graduation in order to lock in a single rate. Taken together, the changes would save the government some $3.7 billion over the next decade.

Democrats, however, say the changes would add thousands to student loan bills once interest rates begin to rise along with the economy. Moreover, when Democrats look at a variable rate like the GOP proposal, they see the potential for a future crisis if interest rates were to skyrocket.

While rates are “freakishly low” today, says Rep. Joe Courtney (D) of Connecticut, “if we look at the housing catastrophe that occurred in the early 2000s, it was built around this false belief that variable rates would never go up, and once they hit that tipping point going up, the whole house of cards collapsed.”

While Obama’s plan would also peg the student loan rate to the 10-year Treasury, he would offer a fixed rate for the life of the loan and a narrower spread (ranging between a 1 percent and 4 percent boost to the rate) and would not cap the interest rate. The president’s proposal would also expand programs that help students fit loan payments to their income.

Democrats say they would prefer to do a student loan fix in the context of a broader look at higher education, with changes to programs ranging from Pell Grants to lower-income students to the data the federal government makes available to families trying to compare different colleges and universities.

But “we’re not going to come together on a comprehensive, long-term solution in the next 40 days that prevents the rates from doubling,” Representative Courtney says.

Instead, congressional Democrats would generally prefer a shorter-term fix that would offer time to implement a comprehensive higher education revamp and at least hold interest rates at their current 3.4 percent or, in the case of Sen. Elizabeth Warren (D) of Massachusetts’s proposal to tie the rate to the ultra-low rate the Federal Reserve lends to commercial banks, cut them severely. (See a comparison of all the different student loan plans from the liberal Center for American Progress here.)

“There actually are a lot of good ideas swirling around out there,” Courtney says.

Capitol Hill has seen some flickers of bipartisan appreciation for higher education initiatives after they were mostly a wedge issue for Democrats to bloody Republicans concerned about their deficit ramifications in the 2012 election year.

The House passed a Republican-sponsored measure, the Improving Postsecondary Education Data for Students Act by unanimous consent on Wednesday, a bill that asks the secretary of Education to determine what data students and their parents should have in order to best compare different institutions of higher learning.

Courtney points out that Kline’s proposal deserves “some credit” for putting a cap on loan rates – even if it’s one he thinks is too high – given the fact that many congressional Democrats aren’t pleased with that aspect of the president’s proposal.

But while the debate will go on, the House took a necessary step toward a solution on Thursday.

“What the House is doing today is a responsible way to deal honestly with the issue of student loans,” House Speaker John Boehner (R) of Ohio told reporters on Thursday. “Can somebody politicize this on the other side of the aisle? Certainly they can.”

“The Senate, when they act,” he continued, “we can go to conference and resolve the differences."