Congress is poised to enact legislation ensuring that 11 million U.S. students pay 3.86 percent instead of 6.8 percent on their next college loan by creating market-based rates for higher-education financing.
The measure, passed by the Democratic-controlled Senate yesterday 81-18, now goes to the Republican-run House of Representatives. Speaker John Boehner said in a statement that the House would “act expeditiously” and called the Senate measure “a victory for students and parents” that’s “consistent with the House Republican bill passed in May.”
The Senate vote ends an impasse between the two chambers over subsidized Stafford loan rates, which doubled on July 1 to 6.8 percent on new borrowing from 3.4 percent after lawmakers failed to pass legislation in time to avert the increase. The measure approved yesterday also replaces fixed rates with variable costs pegged to the yield of 10-year Treasury notes.
“It makes loans cheaper, simpler, fairer, more certain,” said Tennessee Senator Lamar Alexander, a former education secretary who was the lead Republican negotiator.
Members of both parties had been eager to send legislation to the White House for President Barack Obama’s signature before the Education Department processes loan requests for the coming academic year. The new rates will be retroactive to July 1.
Negotiating the changes took months, in part because Senate Democrats resisted the idea -- first advanced by Obama -- of variable rates tied to the bond market. Senate Democrats had sought to keep the cost at 3.4 percent for another year.
“This is the best deal we could get for students,” said Senator Tom Harkin of Iowa, who led Senate Democrats against pegging borrowing costs to the market. “It is going to lower interest rates this year.”
Before the vote, Harkin exhorted Democrats not to “let the perfect become the enemy of the good” and accept “a true compromise” with Republicans. In floor debate he asked: “Would there be a better deal? How about free money?”
In the end, 17 members of the Democratic caucus voted against the bill. Just one Republican, Mike Lee of Utah, opposed it.
Last year, Congress extended the fixed 3.4 percent rate for subsidized Stafford loans after Obama made it an issue in his re-election campaign. Republican challenger Mitt Romney also backed a 12-month extension, forcing the Republican-run House to go along with the president and Democrats.
Once that temporary measure expired, the interest rate for subsidized Stafford loans, available to lower-income students, doubled. Unsubsidized Stafford loans, available to all attending college, were already at a fixed 6.8 percent.
If the bill becomes law, the rate for all undergraduate Stafford borrowers will be 2.05 percentage points more than the yield on the 10-year Treasury note at the last auction before June 1. This year, that figure was 1.81 percent at the May 15 auction, so the Stafford rate for the 2013-2014 academic year that begins in September would be 3.86 percent.
Undergraduate debt costs would be capped at 8.25 percent.
Graduate Stafford loans would be marked up 3.6 percentage points from the 10-year Treasury yield, with a maximum rate of 9.5 percent. For the coming school year, it would be 5.41 percent.
PLUS loans, available to parents and graduate students, would be 4.6 percentage-points more than the 10-year Treasury yield, capped at 10.5 percent. The rate for the coming year would be 6.41 percent.
Next week, Republican leaders will ask House members to accept changes made by the Democratic-controlled Senate to the House-passed bill, said Republican aides who spoke on condition that they wouldn’t be identified in speaking about internal matters. The House bill, H.R. 1911, also pegged student loans to annual changes in the yield on 10-year Treasuries.
“I do see it passing the House,” Representative John Kline, the Minnesota Republican who leads the chamber’s Education and the Workforce panel, said in an interview before the Senate vote. “The faster we do it, the better.”
In a statement after the Senate passed the compromise, Kline predicted its “swift passage in the House.”
Opposition by Senate Democrats to variable loan rates had pitted them against the president and House Republicans. At a White House meeting last week, Obama, who opposed the House measure, prodded the bipartisan group of eight senators to compromise. The administration supports the Senate version.
Harkin, the last holdout among the negotiators, went along with the deal after Republicans agreed to set a cap on the interest on the undergraduate loans.
Opponents of the measure such as Senator Elizabeth Warren, a Massachusetts Democrat, argued that it did little to make college more affordable or reduce the almost $1.2 trillion in student debt outstanding. Most, 85 percent, of that debt is made up of government-backed loans; the rest were made by lenders such as SLM Corp., commonly known as Sallie Mae.
“Our students are drowning in debt; we must find a way to address this crisis,” Warren said during floor debate. The measure “asks tomorrow’s students to pay more in order to finance lower rates today,” she said.
Harkin, who leads the Senate’s Health, Education, Labor and Pensions Committee, said the panel will “revisit the issue” when it drafts a bill to revamp U.S. higher-education programs and “address the whole issue of college affordability.”
The measure passed after amendments by Senator Jack Reed, a Rhode Island Democrat, to cap undergraduate loans at 6.8 percent and another by Vermont independent Bernie Sanders to end the variable-rate system in two years were both rejected. Neither got the 60 votes needed to pass under an agreement between Majority Leader Harry Reid and Republicans.
“We are failing millions of families right now,” said Sanders, who caucuses with Democrats. “This legislation will make a bad situation worse.” Sanders cited Congressional Budget Office projections that undergraduate student loans would carry interest rates of more than 7 percent in five years.
Louisiana Democratic Senator Mary Landrieu said she was supporting the measure because the “compromise is much better than the original Republican House version.”
That measure would have provided a 2.5 percentage-point markup from the 10-year Treasury yield for undergraduate loans. It also would have reset the rate each year, including on money already borrowed by students to finance their education.
Under the Senate legislation, a student would lock in an interest rate each year they take loans for college expenses.