(AP) It's a better deal at first, but college loan rates could steadily climb and cost students more over the long haul under the plan House Republicans are considering.
Members of the Republican-led House Education and Workforce Committee on Thursday began to finalize a bill that would keep interest rates from doubling on new subsidized Stafford student loans on July 1. The GOP measure provides lower rates immediately and for the next few years, but the plan also comes with potentially higher costs for some students in coming years.
Democrats stood unified in opposition.
"Our families deserve better than this bait and switch," said Rep. George Miller of California, the senior Democrat on the committee.
Without Congress' action, interest rates for new subsidized Stafford student loans would double from 3.4 percent to 6.8 percent on July 1. Neither party wants to see that happen, although there are strong differences in the methods to dodge that.
"Student loan rates should not be subject to the whims of Congress," said Rep. Virginia Foxx, R-N.C. "Students' families and taxpayers deserve a long-term solution. ... This legislation offers predictability and simplicity."
Under the proposal by the committee's chairman, Rep. John Kline, R-Minn., student loans would be reset every year and based on 10-year Treasury notes, plus an added percentage. For instance, students who receive subsidized or unsubsidized Stafford student loans would pay the Treasury rate, plus 2.5 percentage points.
Using Congressional Budget Office projections, that would translate to a 5 percent interest rate on Stafford loans in 2014 but climb to 7.7 percent for loans in 2023. Stafford loan rates would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent ceiling under the GOP proposal.
"These rates reset every year. Buyer, beware," said Rep. Joe Courtney, D-Conn.
In real dollars, the GOP plan would cost students and families heavily, according to the nonpartisan Congressional Research Service. The office used the CBO projections for Treasury notes' interest rates each year.
Students who max out their subsidized Stafford loans over four years would pay $8,331 in interest payments under the Republican bill, and $3,450 if rates were kept at 3.4 percent. If rates were allowed to double in July, that amount would be $7,284 over the typical 10-year window to repay the maximum $19,000.
For students who borrow the maximum subsidized and unsubsidized Stafford loans, they would pay $12,374 in interest under the Republican bill. The interest charges would be $10,867 if subsidized loans were allowed to double in July, or $7,033 if rates stay the same. The maximum available in subsidized and unsubsidized amounts is $27,000 for four years of school.
Graduate students and parents, meanwhile, would see interest payments reach $27,680 for four years of college under the GOP plan. If Congress keeps the rates the same, their interest payments would be $21,654 on the original maxed-out $40,000 loan, according to the Congressional Research Service report.
Democrats opposed Kline's plan and urged lawmakers to extend the 3.4 percent rate for subsidized Stafford loans for two years while leaders work on a long-term fix.
"This is a bait-and-switch marketing scheme," said Ruben Hinojosa, D-Texas.
Republicans, however, stood by the proposal and said the increased rates would pay down the federal debt.
"I would love to have the rates at 2 percent. It's just not realistic," said Rep. David Poe, R-Tenn.
The White House, meanwhile, remained skeptical of the House measure.
"While we welcome action by the House on student loans, we have concerns about an approach that both fails to guarantee low rates for students on July 1 and asks too many of them to bear the burden of deficit reduction through unaffordable rates," White House spokesman Matt Lehrich said in a statement.
Obama's budget outline included flexible rates for student loans, pegging the interest to markets, but did not have a cap. Republicans had long pushed for the flexible rates and Kline said he would go along with Obama on that principle while adding a cap that Democrats sought.
During the 2010-11 academic year, about 7.5 million undergraduates borrowed from the subsidized Stafford loan program. In all, there were 36 million students loan borrowers through federal programs, according to the Education Department.