6/17/2013: In what could become an
annual occurrence, Congress yet again faces a looming deadline to resolve the problem
of student loan interest rates. Without Congressional action, the rate on
federally backed Stafford loans is set to double from 3.4 percent to 6.8
percent on July 1.
The Senate in early June
failed to advance two bills meant to prevent this imminent increase in rates. A bill backed by
Democrats would extend the current interest rate for two years, and offset
the cost by ending three tax breaks. A GOP bill would peg
all newly issued student loans to the U.S. Treasury 10-year borrowing rate plus
3 percentage points. Given the current Treasury rate of 1.75 percent, a student
taking out a loan this coming school year would pay 4.75 percent for the life
of the loan under this proposal. The Democrats’ bill garnered 51 votes,
shy of the 60 needed to end debate, while the Republican proposal failed 40 to 57.
Meanwhile, the House in May passed
a different Republican plan in a 221 to 198 vote,
largely along party lines. This plan would permanently
fix the problem by tying the student loan interest rate to the 10-year Treasury
rate plus 2.5 percent. The bill would also reset the rate every year, though
students could consolidate their loans into a fixed rate after graduation, and
it would cap this rate at 8.5 percent.
The bills that have been
voted on are among numerous measures put forward to deal with this political
hot potato. House members have introduced bills to extend the 3.4 percent rate
for another year (Rep.
Hakeem Jeffries (D-NY)), two years (Reps. Joe Courtney
(D-CT) and Louie
Gohmert (R-TX)) or four years (Rep. Kyrsten Sinema
Elizabeth Warren (D-MA) and Rep. John Tierney
(D-MA) have proposed to key the student loan rate to the rate the Federal
Reserve charges banks for very short-term loans, currently 0.75 percent.
Other lawmakers have tackled
the interest rate issue as part of a broader reform of the federal student loan
system. Thus, Rep.
Tom Petri (R-WI) has filed a bill to calculate loan repayments based on the
borrower’s salary, while also fixing the interest rate to the 10-year Treasury
rate plus 3 percent. Rep. Karen Bass (D-CA) has introduced the Student Loan Fairness
Act, which, among other things, would permanently cap the interest rate for
all federal student loans at 3.4 percent.
The potential change in
interest rates on subsidized student loans has its origins in a 2007 bill intended
to boost college aid. In addition to increasing grant amounts to students and improving
access to student loans, the College Cost
Reduction and Access Act established a stepped reduction in interest rates.
Beginning in July 2008, the rate was lowered over the course of four years from
6.8 percent to 3.4 percent, and was supposed to revert to 6.8 percent in July of
Just two days before the July 1, 2012 deadline, Congress passed an extension of the 3.4
percent rate for another year. The temporary fix was adopted as part of a transportation spending
bill that passed the House by a vote of 373 to 52 and
the Senate 74 to
19. The $6 billion price tag associated with the extension was paid for by limiting
students’ eligibility to subsidized loans to six years and changes in pension
laws. A year has gone by, and now legislators are back at square one.
The summary below was written by the Congressional Research Service, which is a nonpartisan division of the Library of Congress.
Student Loan Fairness Act - Amends title IV (Student Assistance) of the Higher Education Act of 1965 (HEA) to establish a 10/10 Loan Repayment Plan that allows borrowers of Federal Family Education Loans (FFELs) and Direct Loans (DLs) to limit their monthly payment on such loans to one-twelfth of 10% of the amount by which their adjusted gross income and that of their spouse (if applicable) exceeds 150% of the federal poverty level.
Establishes a 10/10 Loan Forgiveness Program that provides FFEL and DL forgiveness to borrowers who, after the date that is 10 years before the date of this Act's enactment, have made 120 monthly payments under the 10/10 Loan Repayment Plan or under another repayment plan that required them to make payments at least as large as those they would have made under the 10/10 Loan Repayment Plan.
Credits the months during which an individual is in deferment due to an economic hardship as months for which payment was made for purposes of the 10/10 Loan Forgiveness Program.
Caps the amount of loan forgiveness that the program will provide to individuals who become new borrowers after the date of this Act's enactment.
Caps the interest rate on new DLs at 3.4%.
Amends the public service employee loan forgiveness program to forgive the DLs of participants who have made 60 (currently, 120) monthly payments on such loans pursuant to specified repayment plans.
Includes primary care physicians in medically underserved areas in the public service employee loan forgiveness program.
Allows certain borrowers to consolidate their private education loans as Direct Consolidation Loans, provided the private loans were made on or before the date of this Act's enactment.
Limits such borrowers to those who: (1) were students eligible for unsubsidized Stafford loans or PLUS loans under the FFEL or DL programs for their enrollment at an institution of higher education, or would have been had they been enrolled on at least a half-time basis; (2) borrowed at least one private education loan for such enrollment; and (3) have an average adjusted gross income that does not exceed their total education debt.
Caps the interest rate on those Direct Consolidation Loans at 3.4%.
Requires borrowers to apply for such loans within one year of this Act's enactment.
Amends the Truth in Lending Act to direct the Bureau of Consumer Financial Protection (CFPB) to issue regulations that require private education lenders to sell private education loans to the Secretary of Education for consolidation as Direct Consolidation Loans.
Sets forth the data to be used in determining the price paid for such loans.
Amends title IV of the HEA to direct the Secretary of Education to pay the interest that accrues on unsubsidized FFELs and DLs that are deferred due to a student borrower's lack of full-time employment.
Requires the Secretary to pay the interest that accrues on Federal Consolidation Loans that are in deferment due to a borrower's lack of full-time employment, provided the application for such a loan is received on or after the date of this Act's enactment.
Directs the Secretary to pay the interest that accrues on FFELs and DLs that are subject to income-based repayment provisions and are in deferment due to a borrower's lack of full-time employment.
Limits these interest-free deferment periods to those occurring on or after the date of this Act's enactment and covering no more than three years of full-time unemployment.
Excludes from a borrower's taxable income the principal and interest on FFELs and DLs that is forgiven pursuant to income-based repayment plans.