| WASHINGTON, April 10
WASHINGTON, April 10 President Barack Obama on
Wednesday proposed shifting federal student loans to
market-based rates rather than the current system in which
interest rates are fixed by law and subject to congressional
The new interest-rate approach is one of several measures
included in President Barack Obama's fiscal 2014 budget proposal
to contain growing student loan debt and make higher education
The president's budget stands little chance of being enacted
into law, but the proposals could help jumpstart congressional
debate about reforming student loans.
Obama's plan also calls for making the rate on new federal
student loans a market interest rate that would remain fixed for
the life of the loan. The proposal calls for expanding repayment
options so borrowers do not have to pay more than 10 percent of
their discretionary income on student loan bills.
Student loan borrowing has risen as the price of higher
education has soared. Americans now owe more than $1 trillion in
student loan debt. The New York Federal Reserve Bank says
delinquency rates have spiked over the past eight years.
In the current system, students pay the same fixed rate, now
set at 3.4 percent, regardless of changes in other interest
rates in the economy. Some economists and lawmakers have said
the system is unfair to students who could end up paying more at
a time when overall interest rates are still at an all-time low.
The president's budget comes just months before interest
rates are set to double to 6.8 percent on millions of
undergraduate subsidized Stafford loans if Congress does not act
to once again extend a freeze on rate increases before July.
The U.S. Public Interest Research Group, a consumer group,
released a report on Tuesday estimating that millions of
students will be forced to pay $1,000 more per year on each loan
they take out if Congress allows interest rates to double.
The group said that the federal government, which makes 36
cents on every federal student loan dollar, should not be
getting such profits at the expense of students. The federal
government issues about 93 percent of U.S. student loans.
U.S. PIRG spokesman Ethan Senack said any approach tying
student loan interest rates to market rates should come with
protections for students down the road.
"As the economy recovers, interest rates are set to rise -
which would leave future students vulnerable to high rates,"
Obama's budget plan also would set aside $1 billion in
grants for states working to improve their higher education and
bring down the cost. It proposes creating a $260 million fund to
reward states and individual academic institutions that take
innovative steps to bring down college costs and improve
The budget would continue funding to the Pell Grant program
that provides financial aid to low-income students, and would
make permanent the American Opportunity Tax Credit that helps
millions of students and families afford college.