Obama: Make Student Loan Rates 'More Market-Based'

Obama: Make Student Loan Rates 'More Market-Based'A major shift is brewing in how repayment of federal student loans is configured as President Obama this week proposed aligning their interest rates closer to the markets, rather than the whim of politicians.
In his just-released budget for fiscal year 2014, Obama mentioned the significance of programs that could lower the surging costs of a college education and slow the student-loan debt bubble that has surpassed $1 trillion.
Obama’s budget proposes a “cost-neutral reform” to set interest rates so they more closely follow market rates, and to provide students “with more affordable repayment options.”
The budget proposes expanding repayment options to ensure that student borrowers do not have to pay more than 10 percent of their discretionary income on loan payments.
Some lawmakers were already considering tying interest rates for federally-subsidized Stafford college loans to market indicators, such as Treasury notes, a move that could exchange one uncertainty — political wrangling — in favor of the potential instability of variable rates.
However, some economists and lawmakers have said the current system is unfair to students who could end up paying more at a time when overall interest rates are still at all-time lows.
Congress last summer approved an extension of the low 3.4 percent rate on federally-subsidized Stafford loans, avoiding a doubling of the rate on July 1.
But that extension is due to expire again this July, when the rate is slated to rise back to 6.8 percent — affecting more than 7 million college students.
Under Obama’s proposal, the rate on new loans would be set each year based on a market interest rate, which would remain fixed for the life of the loan.
This way, “student borrowers would have certainty about the rates they would pay,” Obama’s budget proposal reads.

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