Student loan rates the next fight on D.C. lawmakers’ agenda

By Karoun Demirjian

Wednesday, June 5, 2013 | 2 a.m.

High school graduations begin this week in Nevada, and seniors will be unleashed to pursue post-secondary plans, which for many, include a turn through college.

As graduates collect their diplomas, lawmakers in Washington will be working to try to guarantee them a more affordable chance to continue their education.

The country is coming up on a familiar deadline: On July 1, interest rates on federal student loans are set to double, from 3.4 percent to 6.8 percent. Such a change would be costly for students who are borrowing to pay for higher education.

But preventing the rate hike won't be easy. In the past several weeks, lawmakers — from the freshest faces in Congress on up to the White House — have floated at least half a dozen proposals to keep interest rates low while also controlling government costs.

Unfortunately, the ideas aren’t necessarily compatible. Some are permanent fixes; other are temporary. Some propose fixed interest rates; others advocate letting them vary with market forces. And some incorporate rate ceilings to guarantee students a worst-case scenario.

The first of the bills is expected on the Senate floor for a vote Thursday. The Democratic proposal would extend the current rate and offset the cost by closing certain tax loopholes, including those enjoyed by the oil and gas industry. The extension would last two years.

It's a nonstarter with Republicans.

“We reject the idea of a short-term political fix,” said Sen. Lamar Alexander, R-Tenn., the ranking member of the Senate committee that handles education policy, on Tuesday. “There’s no reason why we can’t work together with the president and the House of Representatives to come up with a permanent solution for student loans that reduces rates for 100 percent of new loans, and do it by July 1.”

President Barack Obama and the House both favor proposals that would tie the interest rate to the market rate — specifically the 10-year Treasury note — plus a set margin. Obama’s would make the initial loan rate fixed while the House’s proposal would let it vary, capping Stafford loans at 8.5 percent and PLUS loans at 10.5 percent.

Stafford and PLUS loans are the two types of federal student loans available: Stafford loans are for student borrowers, while PLUS loans are for the parents of students. Stafford loans may be either subsidized or unsubsidized, with the subsidized-interest loans going to student borrowers demonstrating financial need.

Senate Republicans also advocate pegging the student loan rate to the market rate.

But for now, Senate Majority Leader Harry Reid, D-Nev., is equally opposed to the Republicans’ preferred approach.

“We have no reason to work out a compromise,” Reid said Tuesday. “If we do nothing, the rates double; if we follow what the (Republican-led) House does, they more than triple. So I’m not looking for compromise, I’m looking for passing our bill.”

The rigidity on all sides ensures that passing a change to the interest rates will be a challenge. If Reid’s attempt to push through the Senate Democrats’ bill on Thursday fails, that poses a potential conundrum.

Reid is hoping to take up student loans Thursday after the Senate wraps up its work on the Farm Bill. But he has also promised to keep the Senate focused on immigration reform, which the chamber is expected to take up next week. That doesn’t leave much time for the student loan debate.

Last year, Republicans and Democrats argued for months before agreeing to offset the roughly $6 billion cost of extending lower interest rates by limiting how long students can be eligible for federal aid and changing the rules on pension program funding.

So far, no contingency plans are in place should Congress come close to missing the July 1 deadline.