Student Loan Legislation Plans: Part I

Michael Lux Blog, News, Student Loans 4 Comments

It has been well reported that the interest rates on certain Federal Loans are scheduled to double from their current 3.4% to 6.8%. In response, numerous legislators and the President have proposed their own plans to address this issue. Here is a summary of all the proposed legislation:

The Obama Plan

President Obama’s Plan calls for setting market based rates on student loans.  Need based loans would be set at .93% above the rate at which the government can borrow money (defined as the 10-year Treasury Bond – currently that number is at about 2%), while loans that are not “need based” (as determined by the FAFSA) would be set at 2.93% above the rate the 10-year treasury rate.  That would mean borrowers for the up coming school year could borrow at 3.43% and 5.43% depending upon their need.

The Pros

The obvious Pro to this plan is that it would significantly lower the rates for students for the 2013-2014 school year.  Another advantage would be that the loan rates are fixed for the life of the loan.  Predictability in loan repayment is definitely a good thing for most people.

The Cons

The big disadvantage of any market based plan is that it has the potential to go very high depending on the strength of the economy.  The Obama plan in particular does not have a ceiling.  This would be bad news for students in a strong economy.  Another major disadvantage would be the fact that it does not address private loans or do anything to address the growing cost of a college education.  Compared to these major problems, interest rates are a much smaller concern.

Chances of Passing

There are actually a lot of similarities between this plan and the House Republican plan.  As a result, something along these lines probably has the best shot at passing, especially considering that this plan has the backing of the White House.

The House Republicans’ Plan

The House Republicans’ Plan, as put forth by Representatives John Kline (R-Minn.) and Virginia Foxx (R-N.C.) has already passed in the House.  Like the Obama plan it sets the student loan interest rates according to the market.  Unlike the Obama plan, it is not fixed and the rates for all students will change with the market.  Also unlike the Obama plan it does not set a distinction between need-based and non-need-based loans.  This plan would set rates at 2.5% above the 10-Year Treasury Rate.  At present that would result in a rate of about 4.5%.  This plan would also cap interest rates at 8.5%.

The Pros

The biggest advantage of this plan is the immediate relief it would provide students.  Having interest rates at 4.5% would be much better than 6.8%.  By setting interest rates according to the market, when we are in a down economy and people are struggling the most with their loans, the interest rates will be lower.

The Cons

Many Democrats have criticized this plan as actually costing students more than what they would save, arguing that even if rates would be lower for a short period of time, in the long run, they would pay more as the economy recovers.  This is troubling considering the fact that news recently broke that in one year alone the Federal Government made a profit of $51 Billion on student loans.  President Obama has vowed to veto this law if it reaches his desk.  Furthermore, like many other plans, it still does not address the major issues of student aid and higher education.

Chances of Passing

This bill has already passed in the House, but has not passed the Senate.  Given President Obama’s promise to veto, it likely stands little chance in its current form.  However, because the President has also proposed a market based plan, passage of a similar bill is a real possibility.

House Democrat Plan #1

Representative Joe Courtney’s (D-Conn.) plan would keep interest rates on need-based loans at 3.4% for the next two years.  He argues that due to the upcoming July 1 deadline, this extension would give the government time to come up with a more comprehensive plan.

The Pros

The good part about this plan is that it would keep rates for many at the current 3.4%.  Hopefully it will also inspire some discussion to address other issues such as the price of college and helping those with private loans.

The Cons

The downside is that the Congressional game of kick the can would continue with no real end in sight.  If this plan were to pass, its certainly possible that Congress would not even address the issue again until the very last second.  At some point these issues need to be actually addressed.

Chances of Passing

This plan is actually very similar to the plan proposed in the Senate and very similar to the measure that passed last year.  It has about as good a shot as any proposed student loan legislation.

House Democrat Plan #2

Representative Karen Bass’s (D-CA) plan calls for much more than just a change in interest rate.  Called H.R. 1330, the core of this bill would create what is called a 10-10 plan.  Under the 10-10 plan students would be expected to pay 10% of their income for 10 years and then they would have the remainder of their debt forgiven.  It would also shorten the time-frame for public service loan forgiveness.  Also noteworthy to this plan is that it would allow people to consolidate their private loans with the federal loans and pay them all off with the 10-10 plan.

The Pros

This site has already addressed many of the advantages for borrowers under this plan.  The extensive borrower advantages would include billions of dollars of student loans being forgiven.

The Cons

This site has also already addressed many of the negative aspects of HR 1330.  The big issues are that this bill is incredibly expensive and still does not fix the problem of high costs of education.  In fact, by making loans so easy to discharge for so many, colleges will be able to continue to raise the cost of education.

Chances of Passing

This bill has been referred to committee where it will likely never see a vote.  It has almost no chance of becoming law.  Sadly, its barely even part of the national discussion.  Regardless of how you feel about the law, it addresses many topics worth further investigation.

Be sure to come back Wednesday for part two of this long list of proposed laws.  Wednesday’s update will include: Plans from both parties in the Senate and plans to change student loans in bankruptcy.

If you were a member of Congress, what would your plan be?  What plan would you vote for and why?


  • I haven’t read enough about it to know which plan is best….but I definitely think that student loan interest rates should go down. They should be able to take advantage of the lower rates we’re experiencing on everything else!

    • That is a wonderful point. If all other interest rates are dropping in the down economy, it doesn’t make sense for student loan rates to stay the same… and it really doesn’t make sense for them to double.

  • I agree with Holly. I don’t know enough to make a decision but it only seems fair to lower the interest on student loans. With interest rates so low on everything else I think college grads should benefit to. They have enough debt to pay back without even factoring interest in.

    • It would seem fair for students to get the benefit of low rates that everyone else does. Student loans are just very unique because the interest rates on most loans are set by congress… unlike credit card, mortgage, and auto rates.