Lawmakers Letting Stafford Loan Interest Rates Double, But Don’t Freak Out Just Yet

U.S. Senators are taking the next week off to relax, which means the June 30 deadline for figuring out a way to keep the interest rates on subsidized federal Stafford student loans from doubling will pass without even an attempt at a last-minute resolution. But some lawmakers aren’t so worried and say they’ll get it all resolved when they come back after the fireworks.

For those coming late to this story, here’s the background. Several years ago, Congress moved to gradually lower the interest rates on subsidized Stafford loans by increasing the federal subsidy. But then that helping-hand was set to expire on June 30, 2012, and the interest was supposed to bounce back to the 6.8% that borrowers pay on unsubsidized Stafford loans.

At the last minute, lawmakers reached a deal that would extend the 3.4% rate for another year, with the plan of figuring out a legislative resolution before the next June 30 deadline.

In May, the House passed the Smarter Solutions for Students Act, which ties student loan rates to the yield on 10-year Treasury notes by adding 2.5 percentage points to the yield rate. If passed as is, loans disbursed after June 30 would carry a rate of 4.5%, more than the current rate, but still less than the original 6.8%.

Since then, there has been a lot of talk about what should be in the bill for the Senate and White House to sign off, but very little has actually been done.

Predictably, there are Senators who worry about the unpredictability of tying student loan rates to something as variable as the yield on a 10-year Treasury note. In the last five years, the yield has gone as high as 4% and as low as 1.38%. Opponents point out that this may not be in the best interest of the borrower, who could get nailed if the yield rate spikes (though there is a cap at 8.5%), or the government, who would be collecting a pittance in interest if the yield rate bottoms out again.

Additionally, some in the Senate and White House want the interest rate to remain fixed for the life of the loan. The House-passed version sets allows for the rate to fluctuate from year to year, meaning the borrower doesn’t quite know how much he or she will have to repay when they leave school.

Then there are those that advocate having a fixed interest rate, or at least one that isn’t tied to something as variable as the yield on a Treasury note. But then that brings up the question of whether the government should set the rate at a point where it can make a profit and use that money to pay down the debt.

None of these issues are going to be resolved between now and midnight on Sunday.

Of course, some in the Senate just want to extend the 3.4% for another year or two and revisit the whole issue at a later date. Senators are meeting on July 10 to take a procedural vote on S. 1238, which doesn’t have a cool name or acronym, but which would extend the current interest rate for another year.

Though this is all after the deadline, the bill’s sponsor, Sen. Jack Reed of Rhode Island, says it wouldn’t be a big deal to have the Dept. of Education retroactively lower the interest rate.

“[W]e’re in a position where we have a window,” Reed tells Bloomberg. “There’s no particular drop-dead date.”

Regardless of what happens in the coming weeks, these changes only apply to Stafford loans with first disbursal after June 30, 2013. So if you already have a Stafford loan, your interest rate is unaffected.

Inaction Means Student-Loan Rates Will Double Next Week [Bloomberg]