White House sets stage for June fight over student loan rates

The White House is setting the stage for a battle with Republicans over the interest rates on federally backed student loans. 

Congress returns to work next week with less than a month to stop interest rates on student loans from rising, but with no clear sense of whether the two parties can agree on a solution.

Before leaving for the Memorial Day break, House Republicans approved a bill that would peg the interest rates to the 10-year Treasury note. The GOP said its bill would create a market-based rate, and stop an immediate doubling of rates from 3.4 percent to 6.8 percent in July.

Democrats were already known to oppose that plan and had argued that this bill could allow rates to rise well above 6.8 percent in the coming years. But on Wednesday, the White House went further by making it clear that Democrats would wage a public campaign against the GOP bill in an effort to secure a different solution.

On Friday, President Obama will host an event with college students to push for keeping interest rates on federally backed loans as low as possible.

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Democrats have not indicated yet that they have decided on a single alternative to the GOP plan. But White House spokesman Jay Carney said Wednesday that Democrats will fight against the Republican bill.

"While we welcome that House Republicans have paid some attention to this issue this year, their proposal unfortunately does not meet the test," Carney said. "It fails to lock in low rates for students while also eliminating a safeguard that provides middle-class families most in need with lower interest rates for student loans."

Republicans reacted to the White House's opposition by arguing that the GOP House has already acted on a plan to address the problem, while the Democratic Senate has failed to do so. Brendan Buck, a spokesman for Speaker John Boehner (R-Ohio), accused the White House of staging an event to distract from the many scandals now plaguing Obama.

"It's obvious that the White House would love nothing more than to change the subject from its growing list of scandals but scheduling this PR stunt reeks of desperation," Buck said. "Picking a fight out of thin air where there's policy agreement isn't going to get the White House out of trouble, and it certainly doesn't do anything to help students facing a looming rate hike."

Buck also argued that Democrats are opposing a GOP bill that is based on a plan Obama himself put forward in his 2014 budget.

Under the GOP's Smarter Solutions for Students Act, federal student loan rates would equal the rate on the 10-year Treasury note plus 2.5 percent. The rate would be variable, and would reset each year, although students could package all their loans into a fixed-rate loan after graduation.

But the GOP bill also caps the rate at 8.5 percent for most students.

The plan put forward by Obama this year would set the student loan rate at the rate of the 10-year Treasury note plus 0.9 percent. It would not be a variable rate, but Obama's plan also did not include a cap.

The House GOP plan and Obama's proposal seem similar enough to allow for an agreement based on playing with the numbers, and in House debate last week, some Democrats agreed that a compromise seems possible.

However, Democrats in the House and Senate have proposed legislation in the meantime that would keep the rate much lower than either Obama or House Republicans have proposed. Senate passage of one of these plans could make it more difficult to find agreement.

For example, Sen. Elizabeth Warren (D-Mass.) and Rep. John Tierney (D-Mass.) have proposed the Bank on Students Loan Fairness Act. That bill would let students borrow money at the government-backed rate of 0.75 percent.

Tierney has defended his bill as one that would let students borrow money at the same rate that banks can borrow money from the Federal Reserve's discount window.

"While the same Wall Street banks that brought our financial system to the brink of disaster can access 'cheap' money, middle-class students are having to borrow at a much higher rate to finance their college education," Tierney said this month.

Warren said her bill would help create an incentive for students to pursue college educations, which she called an investment that would pay back the country later.

"We should be encouraging our students by investing in their education," she said. "Keeping interest rates low not only will help young people who are drowning in debt, but also will strengthen our economy and help grow the middle class."

Earlier in the month, Tierney proposed another bill called the Responsible Student Loan Solutions Act, along with Sen. Jack Reed (D-R.I.). That bill is aimed at providing the lowest rates possible for students, rates that are just high enough to pay back the costs of running the government's student loan program.

Specifically, this bill would create a rate equal to the rate of the 3-month Treasury note, plus a percentage to cover the costs of the government. That would likely keep rates even lower than today's 3.4 percent rate, as the 3-month note is near zero percent.

"The Responsible Student Loan Solutions Act is a fiscally responsible, common-sense approach to making our financial aid system more effective, affordable and sustainable in the long run," Reed said of his bill earlier this month. "The Student loan interest rate offered by the government shouldn't be needlessly high; it should be based on actual costs."

As of this week, Senate Democrats had not indicated which of these bills they might consider in June, or whether they would try to consider any bill at all in June.