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, approved largely along party lines 221-198, kicks off what is sure to be the next showdown between House Republicans, Senate Democrats and President Barack Obama, with a hard deadline looming in little more than a month. Republicans said they had come up with a long-term plan that would get the government out of the business of setting interest rates.
"What the House is doing today is a responsible way to deal honestly with the issue of student loans," Speaker John A. Boehner of Ohio said. "Can somebody politicize this on the other side of the aisle? Certainly they can."
Democrats jumped on the issue to say House leaders are intent on raising the cost of already onerous student debt. They quickly signaled that the brewing fight would become a major political rallying cry.
"It's really stunning," said Rep. Nancy Pelosi of California, the House Democratic leader.
At stake is a subsidized loan rate of 3.4 percent for more than 7.4 million students with federal Stafford loans, which would jump to 6.8 percent if Congress fails to act. Democrats fixed the 3.4-percent rate before Republicans took 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 Democrats in the Senate dead set against their approach and a threatened White House veto.
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, $8.3 billion, would be paid by closing tax loopholes. Sen. Kirsten Gillibrand, D-N.Y., would go further, setting a 4 percent rate for all student loans and allowing graduates with higher interest-rate loans to refinance at that level.