NEW YORK — President Obama’s budget proposal tying student loan interest rates to the market is drawing criticism from education advocates because there’s no cap to protect borrowers when rates climb.
While the cost of borrowing in general today is low, there is a long-term risk for students, said Jennifer Mishory, deputy director of Young Invincibles, a Washington nonprofit that advocates for the interests of 18- to 34-year-olds.
‘‘There must be a cap on how high those rates could go, otherwise students could be facing much higher debt levels and could be deterred from even going to school at all,’’ Mishory said.
Under Obama’s plan, rates on subsidized Stafford loans, which are for undergraduates from low-income families, would be set yearly based on the market and would be fixed for the life of the loan. Outstanding education debt is now at $1 trillion. Rates on student loans are higher than on mortgages because they aren’t backed by any collateral and students often don’t have credit histories.
Rates on subsidized Stafford loans are set to double July 1 to 6.8 percent from 3.4 percent. Graduate students pay at a rate of 6.8 percent or 7.9 percent.
If Congress can’t work out comprehensive student loan overhaul before July 1, lawmakers should temporarily extend the current rate for subsidized Stafford loans, said Ethan Senack, a higher-education associate for US Public Interest Research Group, which advocates for students.
The cost to the government to implement the plan would be $25 billion in the first five years and would save $15 billion over 10 years, according to Jason Delisle, director of the federal education budget project at the New America Foundation, a Washington nonprofit public policy institute.
The long-term savings comes from government projections that 10-year Treasury rates will rise in the future, and that rates on future cohorts of student loans would be above 6.8 percent, he said.
Republicans also favor tying the loan rate to the market.
On Tuesday, Senators Tom Coburn of Oklahoma, Richard Burr of North Carolina and Lamar Alexander of Tennessee introduced a bill for all newly issued Stafford loans and PLUS loans for parents and graduate students to be tied to the Treasury’s 10-year borrowing rate plus 3 percentage points.