House passes GOP student loan bill, sets up Obama showdown

The House on Thursday passed a Republican bill that would permanently peg federal student loan interest rates to government interest rates, defying a veto threat from President Obama.

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Members passed the Smarter Solutions for Students Act, H.R. 1911, in a 221 to 198 vote. The bill won the support of just four Democrats, while eight Republicans voted against it.

The legislation is the Republican answer to a problem both parties are trying to solve — how to stop federally backed student loan interest rates from doubling from 3.4 percent to 6.8 percent on July 1. 

The Democratic-led House temporarily lowered rates in 2007, and for the last few years, Congress has struggled to deal with the reality of having the rates snap back to the higher level.

Republicans said during debate that Congress needs to set a market-based formula for student loan rates and get out of the way. They said leaving Congress in control only politicizes the rates. 

House Education and Workforce Committee Chairman John Kline (R-Minn.) said President Obama campaigned last year on the need to keep the rates low, even though Democrats were the ones who created the conditions for a potential rate increase.

"No one wanted to see interest rates double," Kline said, noting that Congress delayed the increase last year. "But we need to move away from a system that allows Washington politicians to use student loan interest rates as bargaining chips, creating uncertainty and confusion for borrowers."

The bill creates a permanent fix by setting student loan interest rates at a level equal to the 10-year Treasury note, plus 2.5 percent. Rates would be reset every year, and the bill would also cap rates at 8.5 percent.

But Democrats argued that the bill would actually force many students to pay more in interest payments, based on the details of the GOP formula.

"Even though the student interest rate is scheduled on July 1 to double from 3.4 to 6.8, the bill presented on this floor today is worse than that for students and their families," said Education and Workforce Committee ranking member George Miller (D-Calif.).

Specifically, Miller and other Democrats have said the formula could allow rates to rise above 6.8 percent in the coming years. They also noted that the bill would create a variable loan rate system for students, which would force them to pay higher rates on old loans when rates rise.

Miller warned that, just like the variable rates that led to a housing market crisis a few years ago, Republicans are proposing a dangerous "teaser rate" for students that could rise later. Miller said the changes in the GOP bill would force students to pay another $3.7 billion in interest payments over 10 years.

Republicans admit that the rate is variable, but note that borrowers would be allowed to consolidate into a fixed-rate loan after graduation.

House passage sets up a June fight with President Obama and Senate Democrats over how to solve the problem. Republicans argue that their bill should be seen as an acceptable solution because it is based on a proposal that Obama offered in his 2014 budget proposal.

Obama also proposed basing interest rates on the 10-year Treasury note. But this week, Obama said there are enough differences between his plan and the GOP bill to warrant a veto threat.

Under Obama's plan, loan rates would equal the 10-year rate plus 0.9 percent, not the 2.5 percent in the GOP bill, although Obama's plan did not include a cap on rates. Additionally, Obama's plan calls for a rate that is fixed for the life of the loan, not the variable rate Republicans offered.

Republicans argue that the two parties are not that far apart. For example, while Democrats say the GOP bill would increase student interest payments by $3.7 billion, Kline noted that Obama's plan would increase these payments by about the same amount, $3.1 billion.

Democrats insisted during debate that Democratic opposition means the GOP bill would go nowhere. But Republicans believe House passage is likely to give them some leverage over Democrats in June.

For example, approval of the House bill could put pressure on the Senate to pass its own proposal. If the Senate does nothing, Republicans would be able to point to their bill as a viable proposal to which Democrats failed to react.

Senate passage of a bill could lead to a House-Senate conference, which could allow elements of the House bill to become part of a final agreement.