By Elvina Nawaguna
WASHINGTON (Reuters) - The White House threatened on Wednesday to veto a Republican bill to switch federal student loan interest rates to a market-based system, arguing the plan would create more uncertainty for students and families.
Under the legislation introduced by Republican Representatives John Kline of Minnesota and Virginia Foxx of North Carolina, subsidized and unsubsidized Stafford loans would be recalculated every year and pegged to 10-year Treasury notes, plus 2.5 percentage points.
Currently, interest rates on those loans are set by the government. Without congressional action, the interest rates are set to double on July 1 to 6.8 percent from 3.4 percent for millions of subsidized Stafford loans.
Republicans and Democrats both agree that rates should not be allowed to double in July, but remain gridlocked on how to keep that from happening.
The Republican-led House Committee on Education and the Workforce voted last week to move the bill to the full House and rejected an amendment by Democratic counterparts to extend the low rates for two more years. The House is set to vote on the bill on Thursday.
It is unclear if the bill will get much traction in the Democratic-led Senate, which is working on an alternative plan to freeze rates at the current 3.4 percent until 2015.
Republicans say their plan is a long-term solution that will take politicians out of the business of setting student loan rates and using them as a bargaining chip.
Lawmakers have expressed growing concerns about American student loan debt, which now exceeds $1 trillion, according to the U.S. Consumer Financial Protection Bureau.
The Republican-sponsored bill is similar to a plan in President Barack Obama's budget proposal, but includes an 8.5 percent cap on Stafford loan rates. A borrower's rates would be recalculated every year, a provision the White House said would create more uncertainty for families and put them at risk of eventually paying more when market rates go up.
"The bill's changes would impose the largest interest rate increases on low- and middle-income students and families who struggle most to afford a college education," the White House said.
Under Obama's plan, the rate on federal student loans would be set each year based on the market rate, but remain fixed for the life of the loan.
Democrats say the Republican plan unfairly targets student and families in their drive to pay down the deficit, and that it bears little resemblance to Obama's plan.
"On the contrary, it costs students and families more than if we did nothing," said California Representative George Miller, the leading Democrat on the House Education Committee. "Congress should work together to address the increased cost of a higher education and rising debt burden, not pull a bait-and-switch and make college more expensive."
The government will make $51 billion from student loans this year, according to the Congressional Budget Office.
The non-partisan Congressional Research Service has estimated that under the Republican plan, a student who borrows the maximum amount of subsidized and unsubsidized Stafford loans over five years would pay $14,430 in interest. If rates were allowed to double on July 1, a student would pay $12,598, compared with $7,965 if rates do not double.
Kline, chairman of the House Education Committee, said in a statement on Wednesday that Republicans would still advance the bill through the legislative process.
"The legislation is based on the president's own proposal, and provides a solid basis for negotiation through the legislative process," he said. "Today's announcement proves the president would rather pick a partisan fight with Congress instead of work in good faith on a bipartisan solution."
(Reporting By Elvina Nawaguna; Editing by Peter Cooney)