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Student loan showdown imminent

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, which passed 221-198, kicks off what is sure to be the next fierce showdown between House Republicans, Senate Democrats and President Barack Obama, with a hard deadline looming in little more than a month. Republicans said they had 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,” said House Speaker John A. Boehner of Ohio. “Can somebody politicize this on the other side of the aisle? Certainly they can.”

Democrats said House leaders were intent on raising the cost of already onerous student debt.

“It’s really stunning,” said Rep. Nancy Pelosi of California, the House minority leader.

At stake is a subsidized loan rate of 3.4 percent for more than 7.4 million students with Federal Direct Stafford Loans. That rate would jump to 6.8 percent if Congress fails to act; Democrats set the lower rate before Republicans swept to 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 Senate Democrats who are dead set against their approach as well as a threatened White House veto.

“Who’s going to set interest rates, politicians here or the markets?” asked Rep. John Kline, R-Minn., 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 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.

Senate Democrats want to extend the current, subsidized rate for at least two years. The cost to the federal government, several billion dollars, would be covered by closing tax loopholes, said Sen. Kirsten Gillibrand, D-N.Y., one of the Senate bills’ primary sponsors. Gillibrand would go further, allowing graduates with higher interest-rate loans to refinance at a subsidized 4 percent rate.

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 the 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. Gillibrand said the 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,” 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.”

BC-US--Student Loans,5th Ld-Writethru

WASHINGTON (AP) — Dismissing a veto threat from President Barack Obama, lawmakers in the House passed legislation that links student loan rates to the ups and downs of the financial markets in a vote largely along party lines.

The Republican-backed bill would allow students to dodge a scheduled rate hike for students with new subsidized Stafford loans next month, but rates could rise in coming years. Democrats largely opposed the measure — which they branded the “Making College More Expensive Act” — while the Republican chairman of the Education Committee labeled the legislation a starting point for negotiations with the Senate and White House.

“The American people sent us here to tackle tough issues, not kick the can down the road. The time to act is now. Students, families and taxpayers cannot afford further delay,” House Education and the Workforce Committee Chairman John Kline said after the vote.

Interest rates on new subsidized Stafford loans are set to double, from 3.4 percent to 6.8 percent, on July 1. Lawmakers from both parties say they want to avoid the increase but were divided on how.

Some Democrats are seeking a two-year extension of the current rates until Congress takes up a higher education bill later. Republicans have rejected that proposal — expected to cost taxpayers $9 billion — as costly and irresponsible.

The House measure passed by a vote of 221-198. Eight Republicans and four Democrats broke from their party.

“It kind of goes without saying that you’re going to be paying on your student loans for quite a while,” said Ron Burruss, who will be a junior at Kentucky’s University of Louisville in the autumn.

By some counts, student loan debt has topped $1 trillion and surpasses credit card debt in size. Only mortgage debt is larger.

Under the GOP proposal, student loans would be reset every year, pegged to 10-year Treasury notes with added percentage points. For instance, students who receive subsidized or unsubsidized Stafford student loans would pay the Treasury rate, plus 2.5 percentage points starting for loans issued after July 1.

Current subsidized Stafford loans are offered at a fixed 3.4 percent rate and unsubsidized Stafford loans are offered at 6.8 percent. The interest rate on loans to parents and graduate students is 7.9 percent.

Using Congressional Budget Office projections, the GOP plan would translate to a 5 percent interest rate on all Stafford loans in 2014, but the rate would climb to 7.7 percent for loans in 2023.

“We’re ripping off kids,” said Rep. Peter Welch, D-Vt.

Stafford loan rates would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent ceiling under the GOP plan.

In his budget proposal, Obama included flexible rate student loan rates pegged to 10-year Treasury bills. The president did not limit interest rates but included a smaller added interest rate. His plan also expanded income-based repayment options and loan forgiveness.

Even so, many students said they were frustrated by the current rates.

“It’s ridiculous that students are being charged 6.8 percent interest, when you can get a mortgage on a house for 3.5 percent,” said Zach Nostdal, a 28-year-old graduate student at Seattle’s University of Washington.

The House proposal faces a steep climb in the Senate despite some similarities to the White House’s offer.

“The Senate is not going to pick this up,” said Rep. Caroline McCarthy, D-N.Y.

The Senate planned to take up its own measure after it returns from Memorial Day holiday. Even then, it’s not clear lawmakers will be able to reconcile differences between the House and Senate versions before the July 1 deadline.

“We are focused on making college more affordable while they seem focused on making it more expensive,” said Sen. Tom Harkin, the Democratic chairman of the Senate Health, Education, Labor and Pensions Committee. “The bill they passed today fails the first test of any policy: do no harm. It’s worse for students than if the rate doubles.”

Students who max out their subsidized Stafford loans over four years would pay $8,331 in interest payments under the Republican bill, and $3,450 if rates were kept at 3.4 percent, according to the nonpartisan Congressional Research Services. If rates were allowed to double in July, that amount would be $7,284 over the typical 10-year window to repay the maximum $19,000.

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