Obama Slams G.O.P Student Loan Proposal as "Not Smart," Urges Congress to Act

May 31, 2013— -- At a Rose Garden event surrounded by students today, President Obama pressured Congress to prevent student loan interest rates from doubling from 3.4 percent to 6.8 percent on July 1, and he slammed the House Republican's proposal as "not smart."

"We know that the surest path to the middle class is some form of higher education," Obama said. "Earning their degree isn't just the best investment they can make for their future, it's the best investment they can make in America's future."

"We can't keep saddling young people with more and more debt, just as they're starting out in life," Obama said.

Congressional Republicans scolded Obama for hosting a "campaign-style" event after House Republicans passed a bill last week to put in place a new plan for calculating student loan interest rates.

"With the president and Congressional Republicans in agreement on the need to provide a permanent reform to address the increase in interest rates on new student loans, no one should be fooled by today's campaign-style event at the White House," said Senate Minority Leader Mitch McConnell, R-Ky., in a statement today. "House Republicans have already passed legislation that would prevent a rate hike, and Senate Republicans have proposed a solution similar to one the president himself called for in this year's budget."

But Obama said that though he's "glad the House is paying attention to it," their bill to address student loan interest rates "isn't smart."

"It fails to lock in low rates for students next year. That's not smart. It eliminates safeguards for lower-income families. That's not fair," Obama said. "It could actually cost a freshman starting school this fall more over the next four years that if we did nothing at all."

The event hopes to reproduce some of the public pressure Democrats were able to gin up last year when Congress faced an identical deadline. Then, Congress voted to temporarily extend the 3.4 percent interest rates for a year, which has prompted a second standoff.

"If this feels like déjà vu all over again, that's because it is," Obama said, exhorting young people to call, email or tweet their representatives about the issue. "You made something bipartisan happen in this town; that's a powerful thing."

Just a month remains for Congress to prevent student loans from doubling on July 1, and both sides are still relatively far apart on a solution. There is one common thread tying the two sides together: everyone seems to acknowledge that financing an education can't stay cheap forever.

The dueling proposals in Congress and from the White House—even the ones that preserve the status quo in the short term—all acknowledge that the 3.4 percent interest rates on federally subsided student loans will probably have to go up. The question now becomes when and how.

Gradually increasing interest rates on student loans may not seem like good news for students in the short term, but if lawmakers in Washington agree on one thing it is that they should be out of the business of setting interest rates.

Since 2007, Congress has kept interest rates for student loans frozen at 3.4 percent, and out of sync with market forces, a policy that has in the past resulted in some unintended negative consequences for students, according to Beth Akers, a fellow at the Brookings Institution.

Fixing the problem most likely would mean pegging student loans to market rates. Those rates are now at historically low levels but they are projected to eventually rise as the economy recovers.

"In the past we've had these fixed interest rates that were set by Congress and at several points in time it has caused a disruption in student lending," Akers said. "The idea that interest rates should be pegged to the market rate makes sense to most people, but it makes it a tough sell politically because we all know that interest rates are going up."

Few people in Washington want to be on record proposing a policy that could eventually mean financing college becomes more expensive for students and their families.

But it is telling that even President Obama in his 2014 budget proposal has a suggested fix that could mean higher rates down the road. If interest rates looked more like they did in 2008, student loan interest rates would be closer to 5.56 percent than the 3.4 percent they are today.

With the House Republican proposal, those rates would be closer to 6.93 percent at 2008 interest rate levels.

President Obama, House Republicans, and Senate Democrat Jack Reed of Rhode Island, have put forward plans that use Treasury interest rates as a baseline for student loan interest rates.

Senate Health, Education, Labor, and Pensions (HELP) Committee Chairman Tom Harkin, D-Iowa, and other Democrats have signed on to a separate plan that calls for a temporary two-year extension to the current 3.4 percent rate, which is intended to serve as a bridge between now and when Congress can hash out the details of a longer-term plan in an education bill sometime next year.

A Senate Democratic aide told ABC News that even though there is an understanding that student loan interest rates will eventually have to vary with the market, Congress should prevent rates from rising above a certain level by including a "cap" on rates. President Obama's proposal does not call for a cap.

Other important differences separate the proposals.

Obama's proposal fixes the interest rate when the loan is issued, and caps loan payments at 10 percent of the borrower's discretionary income. The Republican proposal allows the rate to fluctuate every year, a provision that has prompted the White House to threaten to veto that bill.

Republicans also include an 8.5 percent cap on subsidized loans and a 10.5 percent cap on subsidized loans for graduate students or parents borrowing for their children.

Last year, in the heat of a presidential election, Obama took to the stump to cudgel Republicans moving slowly to address an identical imminent doubling of student loans. For their part, Republicans agreed to keep the rates low, but wanted to pay for it by slashing a program in the president's health care law, which was sure to produce a major political fight.

The time for Congress to figure this out is quickly waning. And already the political demagoguery has begun.

House Republicans passed a bill last week proposing that interest rates be determined by adding 2.5 percentage points to the market rates, a plan that is intended to raise revenue – around $3.7 billion in deficit reduction.

Democrats have roundly rejected this proposal, which they say raises rates too high, too quickly. Obama pledged to veto the Republican bill if it came to his desk.

The president plans to pressure Congress to prevent rates from increasing to 6.8 percent at an event with college students at the White House today.

But at least they're talking policy, which may lend itself to finally figuring out a long-term solution.

"I think the difference is an openness to a longer term solution and I think that stems from folks on the Republican side proactively looking to tackle it as opposed to reacting to it," said Carmel Martin, executive vice president for policy at the Center for American Progress.

Now may be the time when both sides are willing to engineer a long-term fix, but old habits die hard in Washington and short-term solutions prompted by looming deadlines seem like the only thing Congress can manage to accomplish.

"It feels like there is an opportunity that folks shouldn't let pass by here," Martin said. But she added that a short-term fix may be the most viable option as the clock winds down.