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U.S. House Passes Student Loan Bill, But Endgame Remains Murky

Student loan rates are set to double on July 1 unless Congress and the Obama administration are able to come to an agreement to head off the rate hike—and it's anyone's guess whether Democrats and Republicans will be able to come together to make that happen.

Here's where things stand right now: The U.S. House of Representatives, largely on party lines, on a vote of 221 to 198, approved a bill Thursday that would tie interest rates on federally subsidized undergraduate student loans to the 10-year U.S. Treasury note, something that the Obama administration also proposed in its fiscal year 2014 budget. Right now, interest rates are at historic lows, so even the 3.4 percent isn't a great deal for students. But that's expected to change very soon as interest rates increase, according to projections from the Congressional Research Service. More here.

There are, however, some key differences between the administration's proposal and the House bill, authored by U.S. Rep. John Kline, the chairman of the House education committee. And the White House thinks the differences are a big enough deal that it threatened yesterday to veto the House legislation—a move Kline called "partisan" in a statement.

So what was the White House's biggest beef? Under the administration's approach, rates on student loans would vary from year to year, but once a student actually took out a loan, the rate would be fixed. The GOP proposal would allow the rate to fluctuate. However, once students graduate, they could package their loans together, take the weighted average of the interest rate on their loans, and lock in that rate for the life of the loan, a House GOP aide explained.

What's more, the administration would seek to keep students from having to fork over a big chunk of their income to repaying loans by expanding so-called income-based repayment programs, while the House GOP would protect students from big interest rate jumps by capping student loan rates at 8.5 percent.

Those differences were a key point of discussion during the U.S. House debate.

"There's a very big difference between the president's [approach] and the Kline bill," said Rep. George Miller of California, the top Democrat on the House Education and the Workforce Committee. He said the GOP bill would "add $4 billion worth of debt onto the backs of students"—a reference to projections by the Congressional Budget Office that the bill would trim nearly $4 billion from the deficit. And he noted that rates wouldn't be locked in for the life of the loan. "This bill essentially asks students to sign up for a loan without knowing what they're signing up for ... Whether they're committed to a market rate or not, I understand that this is a very flawed bill."

But Kline said there was a lot of misinformation about the committee's approach. He noted that students would be able to consolidate their loans into a fixed rate if they wanted to, after graduating, which he argued could result in a better deal for students if rates are low. And he urged lawmakers to advance the bill so that the White House and Congress could begin to hammer out their differences.

"We believe that we can work together," he said Thursday during floor debate.

Meanwhile, over on the Senate side, lawmakers including U.S. Sen. Tom Harkin, D-Iowa, the chairman of the Senate education committee, and Sen. Harry Reid, the Majority Leader, have introduced legislation that would keep loan rates stable at 3.4 percent for the next two years. That would give Congress time to work out a long-term solution to the loan rate problem, likely through a reauthorization of the Higher Education Act, which governs the student lending program.

U.S. Secretary of Education Arne Duncan told lawmakers earlier this week that he wants a long-term solution to the student loan problem, not a short-term fix. Still, in a statement released Wednesday, Duncan seemed to indicate that he would be willing to go along with the short-term fix sought by congressional Democrats. "Given the impending July 1 deadline, an extension that protects students against higher rates while Congress develops an alternative solution is another reasonable option," he said.

So ... the bottom line is that student loan rates, like virtually everything else in Washington, remain locked in a protracted, partisan battle. We'll see if lawmakers can reach a solution before the interest rate changes on July 1.

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