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House Republicans move to stop student loan rate hike

Jun 10, 2013 Philip Burgess

The House of Representative is considering legislation to stop the interest rate on federally financed student loans from doubling on July 1, 2013. Borrowing for higher education has consistently been on the rise and is starting to effect the overall growth of the economy.

A substantial rate hike
There is bi-partisan agreement that allowing the subsidized Stafford loan rate to go from 3.4 percent to 6.8 percent in July is not a desirable outcome.

The plan House Republicans are considering would not set a new rate. Instead it would tie the loan's to the interest on a 10-year Treasury note, plus 2.5 percent. A cap would further prevent the interest on Stafford loans from exceeding 8.5 percent.

The republican plan resembles a proposal from President Barack Obama from earlier in 2013. The administration plan called for the rate to be set at slightly less than 1 percent above a Treasury note and would freeze the interest rate on a loan at its original level over its entire lifespan. The republican version calls for the rates on Stafford loans to reset once a year.

"No one wants to see student loan interest rates double on July 1," said Minnesota Republican Representative John Kline, reports USA Today. "The president put forth a plan in his budget to address the problem with a market-based solution, and my Republican colleagues and I worked in good faith to offer a proposal that largely mirrors the president's."

House Democrats have sought a shorter term solution to the looming rate hike, proposing instead to extend the 3.4 percent rate for two years to give legislators adequate time to find a long-term solution, according the news source. The interest rate was initially lowered in 2007 as part of the economic stimulus package. The rate was originally intended to gradually rebound over a four year period, Congress voted last year to extend the 3.8 percent rate while the economy continued to recover.

Student loans already a drag on consumer credit reports
According to a report earlier in 2013 by the New York Federal Reserve, student loans were the one form of borrowing that turned out to be recession proof. From 2004 to 2012, the number of people taking out student loans and their average debt level have both increased 70 percent, reports CBS.

Americans borrowed $76 billion to finance education for the 2011-2012 school year, according to the Pew Research Center and the total amount owed in student debt exceed $1 trillion.

Education is now the second largest source of debt in the nation, following mortgage debt, according to CBS. The average college graduate emerges from their university owing $26,000.

Those debts are putting pressure on other aspects on the economy. For example, according to the data from the New York Fed, those carrying student loan debts are less likely to take out an auto loan. According to The Washington Post, at least one possible explanation for this is an unwillingness among recent college grads to take on more debt.

Large education loans balances are also pushing an increasing number of students into delinquency and resulting in the commencement of debt collection procedures. In 2012 11.7 percent of student loan holders were more than 90 days late with a payment, according to the New York Fed. That is up over 3 percent from 8.5 percent in 2011.

New Congressional plan faces a tough road to passage
With loan debts already exerting some problematic pressures on the economy, there is bi-partisan agreement that allowing the interest rate on Stafford loans to double in July 2013 could be disastrous for both students and overall economic recovery.

The House Republican plan has drawn criticism, particularly for the provision that allows the interest rate on student loans to be re-adjusted each year. President Obama has said he will veto the legislation without a fixed-rate on Stafford loans, reports the Post.