Senate's Student Loan Bill Heads Into Hurdles

Photograph by Akihiro Sugimito

Update, 6:15pm:  Updates story and headline to reflect the CBO’s new cost estimates of the proposal.

The Senate may have finally found a student loan fix that philosophically may be palatable to both parties—even to House Republicans—but its cost may end up killing it chances of passing. It’s been 10 days since July 1, when the interest rate on new federal loans for 7 million lower-income students doubled after Congress had failed to pass a fix. The rates reset from 3.4 percent to 6.8 percent for subsidized Stafford loans for needy undergrads.

According to Bloomberg News, under a tentative Senate plan reached on Wednesday night, all undergrad loans (both subsidized and unsubsidized) would be set at 1.8 percentage points above the 10-year Treasury note. The rate would be capped at 8.25 percent, according to the New York Times. Grad student and parent loans would be set at 4.5 percentage points above the 10-year Treasury note, with a 9.25 percent cap, Bloomberg News reports.

The rate would be set at the beginning of each fiscal year, based on what it costs the government to borrow, and would remain fixed for the duration of the loan. If the bill passes, it would retroactively apply to any loans issued since July 1. If a student were to borrow now under this proposed plan, the rates would be lower than under the current law.

As we’ve reported, both President Obama and the House GOP wanted student loan interest rates to more closely reflect market rates, rather than be fixed at one rate, regardless of the economic environment. The biggest questions have been how much more students would pay over the government’s borrowing costs and—the most contentious point—whether there would be a cap on how high interest rates can go.

Compared to the tentative Senate bill, the House plan has slightly higher undergrad rates and a slightly higher cap; it offers the same graduate student rates with a slightly higher cap. The biggest difference between the bills is that the House plan proposes rates that fluctuate with the market over the life of a loan, rather than be fixed at the beginning.

So the success of the tentative agreement will hinge on a few questions:

• First, what will it cost? Democrats had insisted that it must cost no more than the existing program (and surely Republicans would require the same)–and their hopes may have been dashed in the afternoon after the Congressional Budget Office said the bill would cost $22 billion over a decade, according to the Wall Street Journal.

• Will the Democrats allow loans to be tied to market rates? They’ve been wary in the past, but with this proposal they won a cap on rates, which they’ve said is essential. Iowa Democrat Tom Harkin, a long-time advocate for students, was part of the group negotiating the bill. If his approval is any indicator, it’s not a huge leap to imagine other Dems signing off on it.

• Will House Republicans accept rates that are set at the beginning of a loan, rather than able to fluctuate over time? Again: not a huge leap, given that it’s a shift closer to the market.

So while the bill may ideologically palatable to both parties, the budget costs are a major handicap to passing. And the clock is ticking till the next school year starts.

    Before it's here, it's on the Bloomberg Terminal.