You can now read 10 articles in a month for free on BostonGlobe.com. Read as much as you want anywhere and anytime for just 99¢.

The Boston Globe

Business

House bill links markets, student loans

‘Who’s going to set interest rates, politicians here or the markets?’

‘Who’s going to set interest rates, politicians here or the markets?’

WASHINGTON — The House on Thursday passed legislation to head off a doubling of student loan interest rates on July 1, instead tying rates to prevailing market trends and ending federal subsidies.

The bill, which passed 221-198, kicks off what is sure to be the next fierce showdown between House Republicans, Senate Democrats and President Obama, with a hard deadline looming in little more than a month. Republicans said they had a long-term plan that would get the government out of the business of setting interest rates.

Continue reading below

“What the House is doing today is a responsible way to deal honestly with the issue of student loans,” said House Speaker John A. Boehner, Republican of Ohio. “Can somebody politicize this on the other side of the aisle? Certainly they can.”

Democrats said House leaders were intent on raising the cost of already onerous student debt.

“It’s really stunning,” said Representative Nancy Pelosi of California, the House minority leader.

‘Who’s going to set interest rates, politicians here or the markets?’

Quote Icon

At stake is a subsidized loan rate of 3.4 percent for more than 7.4 million students with Federal Direct Stafford Loans. That rate would jump to 6.8 percent if Congress fails to act; Democrats set the lower rate before Republicans swept to control of the House in 2011. Last June, Republicans buckled under political pressure and extended the subsidized rate for one year, just two days before its expiration.

This time, Republican leaders insist they will hold firm, but they face Senate Democrats dead set against their approach and a threatened White House veto.

Continue reading below

“Who’s going to set interest rates, politicians here or the markets?” asked Representative John Kline, Republican of Minnesota, and chairman of the House Committee on Education and the Workforce.

The House bill would allow student lending rates to reset each year, based on the interest rate of a 10-year Treasury note, plus 2.5 percentage points for Stafford loans. The Congressional Budget Office projected rates on Stafford loans would rise to 5 percent in 2014 and 7.7 percent in 2023. Under the legislation, Stafford loans would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent cap.

Senate Democrats want to extend the current, subsidized rate for at least two years. The cost to the federal government, several billion dollars, would be covered by closing tax loopholes, said Senator Kirsten Gillibrand, a New York Democrat, one of the Senate bills’ primary sponsors. Gillibrand would go further, allowing graduates with higher interest rate loans to refinance at a subsidized 4 percent.

Obama has a different proposal that would fall somewhere between the House and Senate bills. He, too, would set student lending rates each year based on the Treasury’s borrowing costs, but those rates would be fixed for the life of the loan, not reset each year. He would also cap student borrowing costs at 10 percent of a student’s income.

The White House proposal has divided Democrats and given Republicans some hope that a negotiated solution can be reached in June. Gillibrand said the income cap should be set at 5 percent, and she still opposes setting rates by market forces, even if those rates are not allowed to fluctuate as the president has proposed.

“The reason why the federal government has made the decision to subsidize education is because getting a college education is the gateway to the middle class,” Gillibrand said. “If you want to create a growing economy and to create long-term investment in our future, that means investing in our kids.”

You have reached the limit of 10 free articles in a month

Stay informed with unlimited access to Boston’s trusted news source.

  • High-quality journalism from the region’s largest newsroom
  • Convenient access across all of your devices
  • Today’s Headlines daily newsletter
  • Subscriber-only access to exclusive offers, events, contests, eBooks, and more
  • Less than 25¢ a week