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Getting Politicians out of the Business of Setting Student Loan Interest Rate
House Republicans advance proposal to tie interest rates back to the free market

Unless a long-term solution is enacted, millions of student loan borrowers will see their interest rates double on July 1, 2013. To prevent this interest rate cliff, House Committee on Education and the Workforce Chairman John Kline (R-MN) and Subcommittee on Higher Education and Workforce Training Chairwoman Virginia Foxx (R-NC) introduced the Smarter Solutions for Students Act (H.R.  1911). But why is this bill necessary? And how will it help student loan borrowers?  Let’s take a look at the facts:

FACT: Several years ago, Washington politicians put themselves in charge of setting student loan interest rates.

Student loan interest rates used to be based on the free market. But in 2002, Congress decided a fixed interest rate set at 6.8 percent would be a better deal for borrowers in the long-run. Despite Republican objections, this fixed interest rate went into effect on July 1, 2006.

In a push to win votes during the 2006 campaign cycle, Democrats pledged to permanently cut student loan interest rates in half across the board. However, after gaining control of Congress in 2007, they realized this campaign promise was far too expensive. Instead they championed legislation to gradually phase down the interest rate on one type of federal student loan - subsidized Stafford loans made to undergraduates - from 6.8 percent to 3.4 percent over four years.   

Per the legislation, interest rates were scheduled to jump back up to 6.8 percent on July 1, 2012. Last year Republicans agreed to extend the lower rate one additional year while working toward a lasting proposal to get politicians out of the interest rate equation.

FACT: The Smarter Solutions for Students Act is the responsible, long-term solution students and taxpayers deserve.

Subjecting student loan interest rates to the whims of Washington creates uncertainty for students and families working to finance a postsecondary education. Rather than keep borrowers in doubt as to whether or not Congress will act in time to prevent arbitrary interest rate hikes, the Smarter Solutions for Students Act ties all federal student loan interest rates (except Perkins loans) back to the free market.

Under H.R. 1911, student loan interest rates would reset once a year and move with the market. Both subsidized and unsubsidized Stafford loan interest rates would be calculated based on the 10 year Treasury note plus 2.5 percent. Parent and graduate PLUS loans would be calculated using the 10 year Treasury note plus 4.5 percent. The legislation allows students to take advantage of lower interest rates when available, while also protecting students against higher interest rates by imposing a reasonable cap of 8.5 percent on Stafford loan interest rates and 10.5 percent on PLUS loan interest rates.  

FACT: There is bipartisan support for a market-based proposal like the Smarter Solutions for Students Act.

President Obama’s Fiscal Year 2014 budget included a proposal to move to a market-based interest rate, signaling a growing consensus that this approach is the better solution for students, families, and taxpayers.

Congressional Democrats, including House Education and the Workforce Committee Ranking Member George Miller, also support a return to a market-based interest rate. And Senator Tom Harkin, Chairman of the Senate Committee on Health, Education, Labor, and Pensions, recently called a provision in the Smarter Solutions for Students Act “encouraging” in an interview with CQ Weekly.  

FACT: The Smarter Solutions for Students Act serves the interests of both students and taxpayers.

Based on the current Treasury note, the Smarter Solutions for Students Act could lead interest rates to drop by as much as 2 percent for millions of Stafford and PLUS loan borrowers this summer. Additionally, the legislation maintains students’ ability to consolidate their loans after graduation and lock in a fixed rate for the life of the loan.

Students can also continue to take advantage of generous federal repayment and debt management initiatives, such as the income-based repayment program, loan forgiveness programs, and opportunities for deferment or forbearance. And unlike short-term fixes that force taxpayers to foot the bill while Congress kicks the can down the road, H.R. 1911 is a fiscally responsible proposal that will not cost taxpayers money over the five and ten year windows.   

The House Committee on Education and the Workforce will mark up the Smarter Solutions for Students Act tomorrow. Tune in to watch the markup live at edworkforce.house.gov/webcast.

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