Senate Faces July 1 Deadline for Student-Loan Reform

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Kevin Lamarque / REUTERS

U.S. President Barack Obama makes remarks on student loans from the White House on May 31, 2013

Over 7 million college students will see their subsidized student-loan rates double on July 1 if Congress can’t reach a compromise to avert the hike. In the meantime, House Republicans — having acted first this time — are using the issue to bludgeon Democrats.

With federal subsidized Stafford-loan rates set to spike from 3.4% to 6.8%, House Republicans passed a bill on May 23 that would tie the rate on the popular loan to the yield on the 10-year Treasury note. The move partly mirrored a plan put forth by President Obama, who also proposed to tie lending rates to market forces. But despite the similarities between the President’s proposal and the House GOP plan, the White House threatened to veto the GOP bill, claiming that it “would impose the largest interest-rate increases on low- and middle-income students.”

Obama’s plan calls for rates to be pegged to the 10-year Treasury note at the beginning of each year. Unlike the House GOP plan, which would allow interest rates to vary after loans are taken out, Obama proposed to guarantee a fixed rate for the life of the loan. The White House argues the House plan would “create uncertainty and lessen transparency” for students considering loans. In addition, it wants to cap borrowers’ obligations at 10% of their discretionary income.

But the White House has a political problem in the Senate, which remains at square one. Senate Democrats rejected a Republican proposal 40-57 on June 6 after their own plan failed to move past a filibuster, 51-46. Their inaction has left the party open to Republican broadsides. “The differences between the House plan and yours are minor,” wrote House Speaker John Boehner in a letter to Obama on June 20. “Republicans have worked … to enact a responsible, bipartisan solution.”

On Thursday, Democratic Senators met with White House chief of staff Denis McDonough, legislative director Miguel Rodriguez and White House official James Kvaal to try to hash out a compromise. According to a source familiar with the meeting, the White House expressed a willingness to make changes to the President’s plan. McDonough suggested the White House would accept legislation that placed a cap on rates if it would lead to an agreement. Such caps are “important for borrowers,” says Caroline Ratcliffe, an economist at the Urban Institute in Washington. “We have fixed rates and rate caps in the mortgage market. We need to have some of those same protections in the student-loan market.”

While Republicans are blasting Obama for opposing a bill that has broad similarities to his, Matt Lehrich, a White House spokesman, told TIME there are crucial differences that make the House measure impossible for the President to accept. “We’re glad House Republicans are paying attention to this looming problem this time around, [but] the plan they passed doesn’t solve it,” Lehrich says. “In fact, a typical freshman could actually pay more under their plan than if Congress did nothing at all.”

Last summer, confronting a similar deadline amid the presidential campaign, both parties decided to punt the issue for a year. This time both want a permanent fix.

There is still hope a deal could emerge before the deadline. One Senate proposal reportedly sets the rates for both subsidized and unsubsidized loans to the 10-year Treasury note, plus 2% — a middle ground between the President’s proposal and that of House Republicans.

“There are a lot of well-intentioned ideas out there, but so far none of them goes far enough to protect students,” says Chip Unruh, press secretary for Democratic Senator Jack Reed of Rhode Island, one of the Senators working to broker a deal. “Keeping the rate at 6.8% may strangely turn out to be a better overall outcome than many of the current proposals.”

It won’t be easy to cut a deal in a week clogged with legislative wrangling over immigration, surveillance programs and the lingering IRS scandal. Congress retains the option to pass legislation after the July 1 deadline that would retroactively maintain or change loan rates. In the meantime, however, Democratic operatives are expressing frustration about the White House decision to threaten a veto on a House bill that, at least in broad strokes, follows Obama’s own prescriptions.

“We will continue to work with Congress on this matter,” White House press secretary Jay Carney said Friday. “We are encouraged by the bipartisan talks taking place in the Senate this week and are confident that an agreement that is good for students is within reach.”