The US House of Representatives has passed a legislation that links student loan rates to the ups and downs of the financial markets.
The Republican-backed bill would allow students to dodge a scheduled rate hike for students with new subsidised loans next month, but rates could rise in coming years.
Democrats largely opposed the measure – which they branded the 'making college more expensive act' – while the Republican chairman of the education committee labelled the legislation a starting point for negotiations with the Senate and White House.
Interest rates on new subsidised Stafford loans are set to double, from 3.4 percent to 6.8 percent, on July 1.
Lawmakers from both parties say they want to avoid the increase but were divided on how.
Some Democrats are seeking a two-year extension of the current rates until Congress takes up a higher education bill later. Republicans have rejected that proposal – expected to cost taxpayers $9 billion – as costly and irresponsible.
By some counts, student loan debt has topped $1 trillion and surpasses credit card debt in size. Only mortgage debt is larger.
Under the proposal, student loans would be reset every year, pegged to 10-year Treasury notes with added percentage points. For instance, students who receive subsidised or unsubsidised Stafford student loans would pay the Treasury rate, plus 2.5 percentage points starting for loans issued after July 1.
Current subsidised Stafford loans are offered at a fixed 3.4 per cent rate and unsubsidised Stafford loans are offered at 6.8 per cent. The interest rate on loans to parents and graduate students is 7.9 per cent.
The plan would translate to a 5 per cent interest rate on all Stafford loans in 2014, but the rate would climb to 7.7 percent for loans in 2023.
The loan rates would be capped at 8.5 per cent, while loans for parents and graduate students would have a 10.5 per cent ceiling under the plan.
In his budget proposal, Obama included flexible rate student loan rates pegged to 10-year Treasury bills. The president did not limit interest rates but included a smaller added interest rate. His plan also expanded income-based repayment options and loan forgiveness.