Student Loan Interest Rates to Go Up After Negotiations Fall Through

This change will likely result in borrowers moving from government subsidized loans to private sector loans, said Todd Vermilyea, senior associate director with the Federal Reserve’s banking regulation division.

Vermilyea said balances of student loan debt are now greater than any other consumer loan product with the exception of residential mortgages. In a slow economy dependent upon young borrowers to spend money throughout their lifetimes, the rate increase in student debt could mean prolonged economic stagnation because young people would reduce their other debt obligations, including credit card, auto, and mortgage debt.

Although private student loans make up only a small portion of total student debt, federal regulators said many people are struggling to repay their private loans.

Doreen Eberley, director of risk management supervision at the Federal Deposit Insurance Corporation (FDIC), told the panel that as of 2011 the size of the private student loan market amounted to about 15 percent of all student loans outstanding. In the 2011-2012 academic year, banks supervised by the FDIC held about $14 billion in private student loans and lent approximately $4 billion in new loans.

President Obama and House Republicans have proposed similar ways of tying student loan rates to 10-year Treasury bills. Nevertheless, the two sides disagree on the details. The White House wants to allow more borrowers to defer payments and not make payments in full. Under the House bill, federal student loan rates would be set at the 10-year Treasury note plus 2.5 percent. The rate would be variable and reset each year. Unlike the House GOP plan, Obama proposed to guarantee a fixed rate for the life of the loan.

Obama said he would veto the House bill if it were to pass in the Senate, saying the legislation “isn’t smart, and isn’t fair.”

With the Senate’s attention focused on the effort to pass a comprehensive immigration bill before Congress left for a weeklong recess, the chances of a quick fix to the student loan interest rate hike seemed bleak even before senators reached a final impasse on Thursday.

“We probably can’t get anything done this week,” said Sen. Tom Harkin (D-Iowa). “We’re working on it, but there has been no agreement so far.”

Alexander and Sen. John Thune (R-S.D.) also downplayed the significance of the deadline, saying lawmakers could return to Washington after the break and deal with the issue retroactively.

Democrats said the Senate would vote on July 10 on a one-year extension of the current interest rates.

A spokesman for Senate Majority Leader Harry Reid (D-Nev.) indicated Wednesday that any bill that ties rates to the 10-year Treasury note had no chance of passing the Senate.

“There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families, instead of closing tax loopholes for the wealthiest Americans and big corporations,” Reid’s spokesman Adam Jentleson said. “Democrats continue to work in good faith to reach a compromise, but Republicans refuse to give on this critical point.”