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Student Loan Standoff to Test Hill’s Summer Tone

The House is leaving for its weeklong Memorial Day break this afternoon after passing a GOP-crafted student loan extension, setting up the first big countdown showdown of the year in just five weeks, just before the congressional break for July Fourth.

At issue is the scheduled doubling of the interest rate on subsidized Stafford student loans, a predicament that also produced a partisan standoff last year that threatened to delay the Independence Day recess. Back then, at the last minute (in an election year), Congress granted a reprieve to 7 million college students and their families, keeping the rate from doubling to a fixed 6.8 percent from the super-low 3.4 percent. But it made the fix for only one year.

With the election past, another round of drama over a temporary solution didn’t at first look likely to be repeated, especially not after President Barack Obama this spring proposed making the rates more flexible by pegging them to 10-year Treasury notes, a market-based approach designed to entice Republican support.

But the GOP bill being passed today takes the idea a significant step further — so much further, in fact, that the Obama administration has threatened a veto.

While the House measure would link the rate to T-bills, as Obama proposed, it would set a much higher cap than the president on the maximum interest rate: 8.5 percent. And it would dictate a resetting of the rate for all borrowers each year, based on market fluctuations (the president’s proposal would fix the initial rate for the life of the loan). The House bill also leaves out the plans for new repayment flexibility that Obama asked for.

The White House and most congressional Democrats say the GOP plan would revive the culture of  predatory adjustable-rate mortgage lending that fueled the housing collapse of the recession, and that lower-income students would end up ruing the day they signed up for Stafford loans.

The next step will come in June, when Democrats try to advance their counterproposal in the Senate. The leading option for them looks to be a lengthy kicking-of-can-down-the-road — continuing the current fixed rate for another two years, thereby synchronizing its renewal with the main law governing federal aid to higher education.

But that tack would cost $9 billion in the meantime, which is the first reason Republicans will balk. GOP critics also note that the current rate was set artificially low as part of the 2009 economic stimulus, which they abhor, and has outlived its justification in light of the improving economy.

The only reason many of them allowed it to continue for the past year, they concede, is that they were asked to give up the fight last summer by Mitt Romney, who endorsed the low rate as part of his effort to win over young voters and seem better tuned to the needs of the less-fortunate. (And we now know how well that worked out.)

Education Secretary Arne Duncan told the House this week that he wants to push hard in June for a market-based compromise and won’t be satisfied with another extension of the status quo. Whether Congress can find an interest-rate middle ground in June will offer a clue of its compromising nature during the rest of the year.

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