Obama proposes market-based interest rates for student loans

By Elvina Nawaguna

WASHINGTON (Reuters) - 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 whim.

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 more affordable.

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," Senack said.

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 graduation rates.

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.

(Reporting by Elvina Nawaguna; Editing by Karey Van Hall and Will Dunham)

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University proposes fracking its own land

NASHVILLE, Tenn. (AP) -- The University of Tennessee wants to allow hydraulic fracturing to extract natural gas on a state-owned tract of rolling woodland and use the revenue to fund research into the environmental impact of such drilling — a proposal that environmentalists condemn as a conflict of interest.

The unique proposal is being considered as national debate continues over "fracking." Energy companies use the procedure to remove gas or oil from rock formations by forcing liquids underground at high pressure. Many universities say they lack the money to properly study its environmental implications.

Gwen Parker, a Nashville-based staff attorney for the Southern Environmental Law Center, said her group is taking a lead in trying to block the move. She called the university's proposal a "fundamental conflict of interest."

"We have not been able to find any instances of a university drilling on their land and funding their research with revenues from the drilling activities," Parker said.

Without an appraisal, it was unclear how much revenue such drilling could yield, though some said it could be in the range of millions of dollars annually.

The university wants state permission to allow an outside company to drill on about 8,000 acres of mature woodlands it maintains as an outdoor laboratory in the Cumberland Plateau — all while performing research on the effects on water quality, air quality and ground impacts.

University officials argue that because the property is state-owned, they can maintain control over the drilling project and provide independent scientific results in an area of the industry where many environmental questions remain.

On Friday, the university presented its proposal to a subcommittee of the State Building Commission, which voted unanimously to allow the university to seek bids from companies.

"Our intention is science-based investigation," said Larry Arrington, chancellor of the UT Institute of Agriculture. "We will move forward in a transparent manner, in which we will seek to engage and receive input from all interested parties."

Before the meeting, about 50 people against fracking held a rally across the street from the state Capitol.

"We should not be allowing fracking in the state of Tennessee until we are absolutely certain that we have regulations ... in place that are going to guarantee the protection of water quality," said Scott Banbury, one of the organizers.

Environmentalists also argue that preservation of the forest tract in question is critical because it is one of the few mature forests still intact in the state's Cumberland Mountains region.

Gov. Bill Haslam is supportive of the university's proposal.

Shale formations undergird a wide swath of Appalachia. Hydraulic fracturing has touched off a boom, making enormous reserves of natural gas accessible where previous methods could not. Natural gas is extracted using large volumes of water, plus sand and chemicals, injected deep underground to break rock apart, freeing the gas. But environmentalists say the fluids could pollute water sources and methane leaks could cause air pollution.

"There are questions surrounding natural gas extraction and we have the facilities, and we have the faculty, so have obligation to investigate in an unbiased, scientific way to provide those answers," said Dr. Bill Brown, dean for research and director of the University of Tennessee Agricultural Experiment Station.

Other universities that have studied fracking have faced criticism about their scientific findings after it became known that researchers had ties to the energy industry.

The University of Texas at Austin recently said it would appoint outside experts to review that school's Energy Institute, which issued a report on environmental effects from gas without disclosing that the lead researcher was also being paid hundreds of thousands of dollars by an energy company.

And in May, a report from New York's University at Buffalo generated similar controversy because of a researcher's ties to the gas industry.

Brown said the faculty who would work on the Tennessee project would be screened for outside relationships with industry contacts. He said other funding sources, such as federal or state grants, would be sought. He also rejected the suggestion that possible involvement by an energy company in the project would affect research findings.

"We need to get past this notion that if the university works with an industry, that somehow we are compromised or tainted," Brown said. "Ultimately, many of the technologies that our faculty develops are going to be delivered to the market through the industry."

Parker said the university has attempted to push this proposal through the approval process without getting an independent appraisal of property value or the natural gas below ground. She also said there hasn't been enough time to get details about the project.

Pittsburgh-based Consol Energy Inc. hired Bryan Kaegi, a fundraiser for Haslam and other prominent Tennessee Republicans, to help shepherd the proposal through the approval process.

Kaegi, who has not registered as a lobbyist, said in the correspondence with school officials that he had met with the governor and environmental officials to make the case for the program. Kaegi did not return messages seeking comment.

Brown said if the subcommittee approves the university's request to seek bids, they will have to evaluate those and go back to the State Building Commission for final approval.

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On the Web:

University of Tennessee's proposal to allow drilling: https://ag.tennessee.edu/Pages/Gas-and-Oil.aspx

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Associated Press writers Erik Schelzig and Lucas L. Johnson II in Nashville contributed to this report.

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