Republican House bill proposes variable rates for student loans

In advance of an automatic increase on student loan rates, House Republicans will take up a proposed bill that would peg the interest students pay on their loans to market-based rates, which some criticize as risky.

The "The Smarter Solutions for Students Act," introduced by Reps. John Kline (R-MN) and Virginia Foxx (R-NC), would move federal student loans from a fixed rate, currently at 3.4 for percent but set to more than double to 7.8 percent on July 1, to a variable one. The new rate that would change yearly based the 10-year Treasury note rate, currently 1.95 percent, plus 2.5 percent. This means that federal student loan rates, rather than jumping to 7.8 percent, would go up to about 4.4 percent, and PLUS loan rates, which parents take out on behalf of their students, would drop from 7.9 percent to an estimated 6.8 percent. Unsubsidized, or private student loans, would have to be offered at the same rate as federal student loans. The House Education and the Workforce Committee is scheduled to debate the bill on Thursday.

The White House has offered up a similar proposal in its annual budget, which would also peg student loan interest rates to the 10-year Treasury note rate, but with a lower added percentage: 0.93 percent for federal student loans, 2.93 for unsubsidized loans and 3.93 for PLUS loans.

Democratic Sen. Elizabeth Warren offered up a proposal that would allow student loans to be paid back at the same rate banks pay, currently 0.75 percent.

The proposal however, might seem like a good deal now, while interest rates are low thanks to a struggling economic recovery, but many worry that the variable rate model would make it even harder for students, who might see their interest rates vary wildly from year to year, to repay their loans.

The Institute for College Access and Success (TICAS) criticized the House bill, saying the bill has "many of the right goals -- to stop the scheduled doubling of interest rates on subsidized Stafford loans, to get away from annual fights about interest rates, and to maintain the long-standing policy of capping federal student loan interest rates. Despite these important goals, the details of the legislation are seriously flawed. If passed, it will lead to higher rates on all types of federal student and parent loans than if Congress did nothing at all."

Update (3:30 p.m. Eastern time): Sen. Tom Harkin (D-IA) and Sen. Jack Reed (D-RI) introduced legislation on Wednesday that offers to freeze tuition rates at 3.4 percent for two years until a long-term solution can be worked out.

In a statement, Harkin, who is chair of the Senate's Health, Education, Labor and Pensions committee, said: "Today we have introduced a responsible solution to keep student loan rates affordable for middle-class students and families struggling to afford college. Unless we act quickly, more than 7 million students, including 250,000 attending Iowa colleges and universities, will see their rates double on July 1. With less than seven weeks left until the deadline, this two-year extension is the most viable way forward to protect students and fully pay for it."

TICAS endorsed the Student Loan Affordability Act of 2013, calling it a "smart, short-term solution."

["Stock Photo: Ethnic Indian College Student With Compositions Notebook, Copybooks And Backpack Holds Pile 100 (One Hundred) Dollar Bills Happy Getting Money Help To Subsidies Costly University Cost" on Shutterstock]