House Panel Approves ‘Borrower-Choice’ Loan-Consolidation Rates

A U.S. House Committee has approved a provision that would give borrowers a choice of interest-rate formulas when they consolidate federal student loans. The House Committee on Education and the Workforce approved an amendment offered by Rep. Thomas Petri, R-Wis., to give borrowers who consolidate their education debt a choice of a variable or a fixed interest rate on their consolidation loans.

On a 27-20 party-line vote, the committee reported out the College Access and Opportunity Act, H.R. 609 to reauthorize the Higher Education Act.

Under the prospective consolidation-loan formula a borrower could choose a variable interest rate based on the 91-day Treasury bill plus 2.3-percentage points, the same repayment rate as for new Stafford loans. The borrower could opt instead for a fixed interest rate, but at a rate 1-percentage point higher than the Stafford-loan repayment rate. In addition, a borrower selecting a fixed-rate consolidation loan could be assessed a 0.5-percentage-point origination fee. Both variable and fixed rates would be capped at 8.25 percent.

Currently, consolidation-loan interest rates are fixed based on the weighted average of the rates of the loans being consolidated, rounded up to the nearest one-eighth of 1 percent. Reports by the Government Accountability Office have warned of burgeoning federal costs of loan consolidation due to the fixed rates offered on the loans in an environment of rising interest rates.

Other key amendments adopted by the committee included the following:

• The committee approved an amendment offered by Rep. Dale Kildee, D-Mich., requiring greater oversight of schools that act as lenders in the Federal Family Education Loan Program.
  
  
• The committee further amended provisions adopted earlier by a subcommittee to include for-profit schools in the definition of an institution of higher education. While retaining the new definition, the amendment clarifies that for-profit institutions are not automatically eligible to compete for funding from federal programs beyond those authorized by the Higher Education Act.
  
  
• The panel approved another amendment offered by Rep. Petri to increase the share of loan-default costs borne by education lenders and student-loan guarantors by 2-percentage points.
  
  
• The committee defeated an attempt to insert into the bill language from the Student Aid Reward Act to preferentially fund Pell-grants to students attending schools that participate in the William D. Ford Direct Loan Program.

The full House is expected to act on reauthorization legislation In September.
For updates on the progress of reauthorization, visit the “2005 Reauthorization”  section of the USA Funds Web site.