By JONATHAN WEISMAN
Published: May 23, 2013 190 Comments
WASHINGTON — The House on Thursday passed legislation to head off a doubling of student loan interest rates on July 1, instead tying rates to prevailing market trends and ending federal subsidies.
The bill, approved largely along party lines, 221 to 198, kicks off what is sure to be the next showdown involving House Republicans, Senate Democrats and President Obama, with a hard deadline looming in little more than a month.
Republicans said they had come up with a long-term plan that would get the government out of the business of setting interest rates.
“What the House is doing today is a responsible way to deal honestly with the issue of student loans,” Speaker John A. Boehner of Ohio said. “Can somebody politicize this on the other side of the aisle? Certainly they can.”
Democrats jumped on the issue to say that House leaders are intent on raising the cost of already-onerous student debt. They quickly signaled that the brewing fight would become a major political rallying cry.
“It’s really stunning,” said Representative Nancy Pelosi of California, the House Democratic leader.
At stake is a subsidized loan rate of 3.4 percent for more than 7.4 million students with federal Stafford loans, which will jump to 6.8 percent if Congress fails to act. Democrats fixed the 3.4-percent rate before Republicans took control of the House in 2011. Last June, Republicans buckled under political pressure and extended the subsidized rate for one year, just two days before its expiration.
This time, Republican leaders insist they will hold firm, but they face Democrats in the Senate dead set against their approach and a threatened White House veto.
“Who’s going to set interest rates, politicians here or the markets?” asked Representative John Kline, Republican of Minnesota, chairman of the House Committee on Education and the Workforce.
The House bill would allow student lending rates to reset each year, based on the interest rate of a 10-year Treasury note, plus 2.5 percentage points for Stafford loans. The Congressional Budget Office projected that rates on Stafford loans would rise to 5 percent in 2014 and 7.7 percent in 2023.
Under the legislation, Stafford loans would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent cap.
The legislation would cut the deficit by $3.7 billion over 10 years, a small but politically significant number, since White House officials say the deficit should not be reduced on the backs of indebted college graduates.
Senate Democrats want to extend the current subsidized rate for at least two years. The cost to the federal government, $8.3 billion, would be paid for by closing tax loopholes.
Senator Kirsten E. Gillibrand, Democrat of New York, would go further, setting a 4-percent rate for all student loans and allowing graduates with higher-interest-rate loans to refinance at that level.
But Mr. Obama has a different proposal that would fall somewhere between the House and Senate bills. He, too, would set student lending rates each year based on Treasury’s borrowing costs, but those rates would be fixed for the life of the loan, not reset each year. He would also cap student-borrowing costs at 10 percent of a student’s income.
The White House proposal has divided Democrats and given Republicans some hope that a negotiated solution can be reached in June. House Republicans said Thursday that they had been negotiating with the White House for weeks, but that those talks broke off under pressure from Congressional Democrats.
Ms. Gillibrand said the White House income cap should be set at 5 percent, and she still opposes setting rates by market forces, even if those rates are not allowed to fluctuate, as the president has proposed.
“The reason why the federal government has made the decision to subsidize education is because getting a college education is the gateway to the middle class,” Ms. Gillibrand said. “If you want to create a growing economy and to create long-term investment in our future, that means investing in our kids.”