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President Obama has convinced the House Republicans to say yes to his proposal of allowing the student loan interest to stay as it is. This was decided after the republicans decided to give an unexpected win for our President according to chairman of education and workforce committee.

The proposal to link student loans to market rates in the budget proposal put forth by our president would be supported by the GOP-led panel of Rep. John Kline, R-Minn according to an associated press release. Kline’s proposal would also include an interest rate cap that is not featured in Obama’s proposal.

He went on to say that the ultimate aim here was to limit the interest rates so that parents and students can take advantage of lower interest on their loans. This proposal would also make sure that the undergraduate loan rates for subsidized and unsubsidized loans remain the same linked to the ten-year treasury notes.

On July 1st, there will be doubling of interest rates on the federally subsidized student loans. There seems to be no way we can avoid this hike that was shelved by the Congress during the recession that began at the end of 2007.

Rates were lowered during the current economic crisis and came down to 3.4 per cent to help students and parents manage their expenses. This rate supposed to get back to the original 6.4 per cent was again postponed for a year last July by the White House and Congress during the presidential campaign.

A deal was offered that will allow the rates to cap permanently at 3.4 per cent by Rep. Karen Bass, D-Calif. Another deal that enabled a two-year reprieve was proposed by Rep. Joe Courtney, D-Conn.
While the Democrat lawmakers continued to support market-based interest rates, they pushed for keeping interest rate low.

While introducing the plan, Sen. Jack Reed, DRI said that loan interest rates should be based on actual cost which is on the 91-day Treasury bill. This means, the financial market situation will determine the shift in interest rates.

An interest of 2.5 per cent above the Treasury ten-year rate will be paid by students taking Stafford loans.  For those who do not take subsidized loans, the rate would be lesser than the otherwise 6.4 per cent and slightly more for undergraduates who take subsidized Stafford loans.

Students taking the PLUS loans would be paying an interest of 6.3 per cent based on the ten-year Treasury rates. This will be lower than the current 7.9 per cent. Kline’s proposal does not touch Perkins Loans taken by financially needy students.

In a nutshell, with increasing treasury rate, there will be a corresponding increase in the student loan rate. House Education and Workforce Committee Democrat Rep. George Miller say that this bait-and-switch scheme will eventually charge students a higher rate of interest currently luring them with short-term lower rate. All we can do at present is to wait and see the implications of this proposal.