Kline's student loan bill gains, but interest spike still looms

  • Article by: KEVIN DIAZ , Star Tribune
  • Updated: May 24, 2013 - 9:41 AM

House OKs Kline measure. The Senate has yet to weigh in.

John Kline
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Minnesota Rep. John Kline

With student loan rates set to double in five weeks, the U.S. House passed a bill Thursday by U.S. Rep. John Kline, R-Minn., to replace the current fixed rates with floating rates tied to government borrowing costs.

But the largely party-line 221-198 vote does not avert the crisis for an estimated 7 million students who rely on federal student loans to meet the challenge of rising tuition costs and difficult employment prospects.

Kline’s bill sets the stage for a high-stakes standoff with the Democratic-led Senate facing a July 1 deadline, with tens of thousands of students looking on from Minnesota, which ranks third nationally in average student debt.

“We’re extremely concerned,” said Moriah Miles, the 23-year-old state chair of the Minnesota State University Student Association, which represents 75,000 students. “Most of us have [federally] subsidized student loans.”

The Obama administration and many congressional Democrats have embraced a switch to market rate loans, ending a system in which rates are set periodically by Congress. But the two sides have yet to come together on which market indicators to use, and how to protect the neediest students from rising rates in the future. Given those differences, the White House has threatened to veto the bill.

Meanwhile student indebtedness continues to skyrocket, reaching $1.1 trillion and surpassing the total credit card debt for all Americans.

Rates set to double

Without an agreement in the coming weeks, the federally subsidized loan rate for undergraduate students is scheduled to jump to 6.8 percent from 3.4 percent. That could double the borrowing costs for Minnesota students, who now graduate with an average debt of nearly $30,000.

Minnesota Sens. Amy Klobuchar and Al Franken, both Democrats, have signed on to alternative legislation that would extend the current 3.4 percent rate for two years, giving Congress more time to work out a long-term deal as part of a comprehensive education package.

Kline’s bill would immediately peg loan rates to 10-year Treasury notes, which have averaged about 1.9 percent this year. With a proposed add-on of 2.5 percent, borrowers could expect to pay about 4.4 percent on popular Stafford subsidized loans this year, although that rate could vary in years to come.

To Kline, this is a better deal for students than the 6.8 percent that looms if no deal is reached by July 1. He also says it would provide more certainty by taking Washington politics out of the equation.

“We have an opportunity today to get politicians out of the business of setting student loan rates,” said Kline, who leads the House Education and Workforce Committee. “We have an opportunity to provide students with more stability in the long run by putting an end to quick fixes and campaign promises.”

The GOP bill also would net the government about $3.7 billion over the next decade, according to a government analysis. Student groups point out that bill would net extra money for the government by raising their costs, likening it to a tax increase to underwrite a loan program that already generated more than $50 billion in revenue in the last year.

“It’s mind-boggling that we hear that education is the future of the United States, but hold on, we want you to take on extra debt,” said Miles, who will graduate this year $42,000 in debt.

Congressional Democrats worry that the GOP approach also would leave students vulnerable to fluctuating markets, with interest rates widely expected to rise over the next five years.

“Unfortunately, the bill today is not the answer students and middle-class families need or are looking for,” said Rep. Tim Walz, D-Minn.

As a hedge, Kline’s legislation would cap Stafford loans at 8.5 percent. His cap on graduate and parent loans would be 10.5 percent, up from the current rate of 7.9 percent.

A government study based on Congressional Budget Office projections has concluded that students who borrow the maximum Stafford loan over five years would pay $10,109 in interest under Kline’s bill, compared to $8,808 if rates are allowed to double to 6.8 percent, and $4,174 if rates are kept at the current 3.4 percent.

Amid a flurry of competing proposals, including one to peg student loan rates to the ultra-low interest rates offered to banks, Kline’s bill could set the stage for a politically sensitive round of negotiations in June, with both sides eager to claim the education mantle.

Despite the prevailing partisan gridlock in Congress, Kline said he’s hopeful for an agreement, because his plan builds on the market-based approach in Obama’s 2014 budget. Kline emphasized that he conferred closely with Education Secretary Arne Duncan. Analysts say significant gaps remain between Kline’s plan and the president’s, which aims to offer students better repayment protections.

In a similar predicament during last year’s presidential elections, Congress chose to punt, leaving the rates where they are now.

 

Follow Kevin Diaz on Twitter at StribDiaz.

  • Student loan debt

    Minnesota’s college class

    of 2011

    • Average student loans: $29,800, from public and private nonprofit universities

    • Rank: Third-highest in country

    • Rate: 71 percent took out student loans (fifth-highest in U.S.)

    • Defaults: Three-year default rate of 9 percent (13.4 percent nationally)

    Source: Institute for College Access and Success

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John Kline