As the July 1 deadline slowly approaches, President Obama, House Republicans and Senate Democrats are scrambling to introduce legislation and make agreements that will keep Stafford student loan interest rates from automatically doubling, and while both parties want to keep the interest rate for federal subsidized students loans from rising to 6.8 percent, they are having trouble agreeing on how best to manage the rates’ future course. The decision will affect more than 7.4 million students who currently hold federal Stafford loans.
The three players in the showdown are each taking different stands. Obama and House Republicans both want to tie the interest rates to prevailing market trails; however, they disagree over whether the rate should be fixed or variable, and whether there should be a cap on it.
House Republicans passed a measure in May that would allow the Stafford student lending rates to reset each year, based on the interest rate of a 10-year Treasury note, plus 2.5 percent. This means that the interest rates would fluctuate based on how much it cost the government to borrow that year. The measure then could benefit borrowers in periods of low interest rates, but it could equally harass them when rates are higher. For graduate student loans, the rate would be the Treasury note plus 4.5 percent.
In addition, under the Republicans’ legislation, Stafford loans would be capped at 8.5 percent while loans for graduate students would have a 10.5 percent cap.
President Barack Obama, too, wants to tie the student interest rate to market trends, but he wants an individual’s rate to be fixed for the duration of the loan, which usually lasts 10 years. He also doesn’t see a need to put a cap on the rates and instead is pushing for the Pay As You Earn repayment plan, which considers a borrower’s income and then caps loan payments at 10 percent of it, eventually forgiving the balance of the debt after 20 years.
Senate Democrats are already planning to vote to maintain the current government-subsidized rate of 3.4 percent for another two years, but House Republicans are planning to stand firm, as opposed to last year when they agreed to extend the subsidized rate for one more year. Democrats set the 3.4 percent four years ago back in 2007, and when it was up for debate last year in June, Republicans agreed to a one-year extension, arguing that they needed more time to construct a “more permanent, budget-friendly solution.”
Don’t Miss: 3 Signs of Hope for the Student Debt Bubble.