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Student loan interest rate showdown returns to Congress

FARGO -- This summer's déjà vu of debate over a popular federal student loan was hardly a surprise after how Congress dealt with it the last time, Jeanne Enebo said.

"They did a one-year extension, and we knew we'd be right back here a year later," said Enebo, student financial services director at North Dakota State University. "Here we are."

For the second summer in a row, unless Congress takes action before July 1, the interest rate on new subsidized Stafford loans will double from 3.4 percent to 6.8 percent.

The House has already passed one plan that would base federal student loan interest rates on the 10-year Treasury rate. Senate Majority Leader Harry Reid, D-Nev., said Wednesday that he'll bring up a bill for a vote today that would delay the interest rate hike for two more years.

The increase was built into a 2007 plan to lower the rate to 3.4 percent over four years, and then have it jump back up last summer to 6.8 percent -- the same rate as the unsubsidized Stafford loans that make up a greater share of federal lending to college students.

The increase was avoided by last-minute congressional action in June 2012, and the July 1 deadline is approaching once again. Enebo said there now are more ideas and more political support to keep the issue from resurfacing.

Sen. Heidi Heitkamp, D-N.D., said that with other major issues now being debated in Congress, including the next farm bill and immigration reform, there's a demand for a long-term solution.

"I think the appetite in Washington, D.C., for short-term fixes is dwindling," she said. "What we're hearing over and over again, and rightly so, from the business community, from the banking community, from anyone, is, 'Look, give us the answer.'"

New options

Rep. Kevin Cramer, R-N.D., voted May 23 for the Smarter Solutions for Students Act, a long-term plan introduced in the House by Rep. John Kline, R-Minn., that would connect student debt to the market changes. The interest for all future subsidized and unsubsidized Stafford loans would be calculated with the 10-year Treasury rate plus 2.5 percent -- an interest rate of about 4.6 percent under current conditions.

It would be variable. When the Treasury rate rises, so would interest on student debt to a maximum of 8.5 percent.

Cramer said holding interest at its current artificially low rate adds to the federal deficit, and the low cost has encouraged a spike in borrowing that's driven up student debt.

"I'd call it a hybrid between the philosophy of not manipulating the markets so much, or skewing them so much that you unintentionally drive up individuals' debt, but at the same time keeping rates more affordable for students and their parents based on financial needs," he said.

Graduate student loans and Parent PLUS loans would have a higher rate of the 10-year Treasury rate plus 4.5 percent, up to a maximum of 10.5 percent.

It is expected that Kline's plan, which passed the House largely along party lines 221-198, has little chance of passing in the Senate, and President Barack Obama has threatened to veto it.

Sen. John Hoeven, R-N.D., supports a permanent fix and could back a plan similar to Kline's proposal, spokesman Don Canton said last week. He said Hoeven believes the interest rate caps in the House plan are too high, and whatever plan is enacted needs to be revenue neutral.

Heitkamp, too, said it's important that interest rates not rise so much that the government profits from the repaying borrowers. She said a plan by Sen. Elizabeth Warren, D-Mass., is "a little extreme" and wouldn't cover reserves for bad debt and other ordinary expenses.

Warren's plan, the Bank on Students Loan Fairness Act, would for one year lower student loan rates to 0.75 percent -- the same as the Federal Reserve's discount window for temporary lending to banks. A petition Warren posted to calling on Congress to approve the plan had more than 440,000 signatures by Wednesday, but her bill has earned little support among lawmakers.

Sen. Al Franken, D-Minn., is a co-sponsor of the Student Loan Affordability Act introduced by Sen. Jack Reed, D-R.I., that could come up for a vote in the Senate today. If approved, the legislation would keep the subsidized Stafford loan rate at 3.4 percent for another two years.

The $8.3 billion cost of keeping the rate lower would be paid by closing three tax loopholes.

"The average college graduate in Minnesota leaves school with more than $29,000 in debt -- among the highest in the country," Franken wrote in a statement. "The last thing Congress should do is saddle future graduates with more debt by allowing the interest rate on subsidized Stafford student loans to double on July 1."

National financial aid expert Mark Kantrowitz said last summer that if the rate rises to 6.8 percent, students would pay an extra $6 per month on the average annual subsidized Stafford loan of $3,357. That would amount to $761 in extra costs over 10 years.

Several other plans have been discussed, including a proposal in Obama's 2014 budget request to tie federal student loan interest rates to the 10-year Treasury rate. But unlike the House plan, his proposal would add 0.93 percentage points to the Treasury rate for subsidized Stafford loans, 2.93 percent for unsubsidized loans and 3.93 percent for Parent PLUS loans.

Obama's plan also would fix the rate for the life of the loan, and it also does not include interest rate caps.

Concordia College Financial Aid Director Eric Addington said his office isn't hearing from students or parents concerned about this possible rate increase. But he said the uncertainty of what Congress will decide -- or whether a final decision will again be delayed for a year or two -- is causing problems.

"We really can't give them a hard and fast answer about what the interest rate's going to be, or how the interest rate works, other than saying Congress is thinking about changing it and we don't know if they will or not until right before the financial aid year starts," he said.

Carolyn Zehren, financial aid director at Minnesota State University Moorhead, said financial aid officials have become used to the uncertainty, with interest rates "all over the board" in recent years. But she said Congress needs to figure out a solution now to put an end to the guessing.

"There are times we can't even counsel a student because they may have been enrolled for a lengthy period of time and they could have multiple interest rates," she said.