House Passes Bill Tying Student Loan Rates To Treasury Notes

While Senator Elizabeth Warren pushes for legislation that would allow student borrowers to enjoy the same insanely low interest rates as big banks (for one year at least), the House of Representatives today passed a bill that would link the interest rates on federal student loans to the yield on the 10-year Treasury note.

Once again, lawmakers are facing a June 30 deadline to figure out how to keep rates on federally subsidized Stafford loans from doubling from 3.4% to 6.8%. The House bill is one proposed long-term solution that proponents say would prevent future 11th-hour short-term fixes.

The Smarter Solutions for Students Act, introduced by Congressman Jon Kline from Minnesota, would link the rates on federal student loans to the yield on the 10-Year note by adding a certain fixed percentage to whatever that yield rate is.

For example, the subsidized Stafford loan would be set at 2.5% on top of the yield rate. Currently, that’s around 2%, so the interest rates for loans first disbursed after June 30 of this year would be 4.5%. This would vary from year to year, depending on the yield rate, but the Act puts a cap on the subsidizes Stafford loan interest rate at 8.5%.

For PLUS loans, the Act adds 4.5% to the given yield rate on the 10-Year note, meaning new borrowers would be paying 6.5% in the coming year. Unlike the current system, which locks students into the interest rate for the life of the loan, the proposed system would allow interest rates to vary from year to year.

The Act would not effect any current student loans, only those with first disbursements after June 30.

All this being said, the legislation stands an incredibly slim chance of making it through the Senate to the White House, where the President would be expected to veto it.

Opponents of the bill say they are concerned about both the interest rate increase and the uncertainty caused by the variable nature of the proposed plan. Senate Democrats have proposed extending the current interest rates for another two years, while the White House has put forth a plan to tie the rates to note yields, but at lower rates than the House bill. The Obama administration has also called for those rates to be fixed for the life of the loan.

House Passes Bill on Variable Student-Loan Rates [Wall Street Journal]