Congress Votes to End Fixed Interest for Student Loans

The U.S. Congress gave final approval yesterday to a bill that pegs interest on government-sponsored student borrowing to a market-based rate, ensuring that almost 9 million undergraduates will pay 3.86 percent on their next loan.

The Republican-run House of Representatives voted 392-31 to accept changes made by the Democratic-led Senate to a measure that it first passed in May. That clears the bill, H.R. 1911, for the signature of President Barack Obama, who backs the compromise. In his budget proposal this year, Obama called for linking Stafford and PLUS loan rates to the government’s borrowing costs.

Enactment of the legislation will provide certainty to students who rely on government loans and to lenders such as SLM Corp., popularly known as Sallie Mae, and Wells Fargo & Co.

“Sallie and other private lenders can know where federal loan rates are going to be and therefore plan accordingly,” said Michael Tarkan, a Compass Point Research & Trading LLC analyst in Washington. “The competition from the private side will go up against the federal PLUS Loan market.”

The new rates, pegged to 10-year Treasury note yields, will be retroactive to July 1 -- the day that interest costs for subsidized Stafford loans doubled to 6.8 percent from 3.4 percent, rising to the rate for unsubsidized loans.

Loan Subsidies

The government pays the interest on subsidized loans while students are in school. Those loans are disbursed based on financial need, while unsubsidized loans have no income requirement. Students take out new loans for each academic year.

Senate Democrats had resisted proposals by both House Republicans and Obama to tie student borrowing costs to Treasuries, which fluctuate. Previously, rates had been set by lawmakers.

The legislative impasse prevented Congress from averting the previously scheduled July 1 doubling of rates for about 7 million low-income students who use subsidized Stafford loans.

Republicans had highlighted the division between Obama and Senate Democrats, with leaders of the House majority repeatedly calling on the Senate to pass a measure meeting the president’s call for interest rates to reflect government borrowing costs.

The breakthrough came on July 18, when a bipartisan group of eight senators agreed to a compromise that the Senate passed, 81-18, on July 24. Republican negotiators led by Tennessee Senator Lamar Alexander, a former U.S. education secretary, agreed to a demand by Democrats that rates for undergraduate loans be capped at 8.25 percent.

PLUS Loans

Costs for about 1.5 million graduate students who take out Stafford loans will be capped at 9.5 percent. The rate limit on PLUS loans for more than 1 million graduate students and parents of undergraduates will be 10.5 percent.

Stafford loans restrict the amount that can be borrowed, while PLUS loans don’t.

“It’s about time that bipartisanship on this issue won the day,” said Republican Representative Virginia Foxx of North Carolina, who leads the higher-education panel of the Education and Workforce Committee.

House Republicans “warmly welcomed” Obama’s proposal for market-based rates and passed legislation “well before” the July 1 deadline, Foxx said during debate on the bill. Senate Democrats instead “chose infighting” over bipartisanship, she said. Republicans blamed Senate Democrats for allowing rates to double on subsidized loans.

Early Action

“The House acted early, long before the deadline,” Majority Whip Kevin McCarthy, a California Republican, told reporters. “The Senate went through a lot of different movements,” he said.

California Representative George Miller, the top Democrat on the education panel, said during the debate yesterday that the compromise produced by the Senate is a “vast improvement” over the original House bill and was worth the wait.

“This bill saves $25 billion for those students over the next five years” compared with the initial House measure, Miller said. The earlier version called for rates to vary on loans after they had been made.

A leading Democratic opponent of variable rates, Rhode Island Senator Jack Reed, argued that the bill marked a “fundamental shift” in how Congress dealt with student loans. Under the bill, he said, students in college now will benefit from lower interest that may be financed by students who won’t start college for four or five years, should rates rise.

Program History

When the direct student loan program began in 1992, 91-day Treasury bills determined subsidized Stafford loan rates. A decade later, a four-year transition began to a fixed rate of

6.8 percent for Stafford loans, which started in July 2006.

In 2007, Congress cut the interest in steps to 3.4 percent for subsidized Stafford loans. That rate was to end on July 1, 2012, and jump to 6.8 percent. Responding to Obama’s election-year call to keep borrowing costs low for financially needy students, Congress extended the lower rate for another year.

When that rate doubled July 1, it put all Stafford loans at a fixed cost of 6.8 percent. The increase put pressure on lawmakers to act ahead of a five-week recess set to begin at the end of this week, so that students returning to college this month wouldn’t see their expenses climb.

Democrats Blamed

Under the measure passed yesterday, all undergraduate Stafford borrowers will pay 2.05 percentage points more than the 10-year Treasury note yield set at the last auction before June.

That figure was set at 1.81 percent on May 15. So the rate for undergraduate Stafford loans for the coming school year will be 3.86 percent.

Stafford loans for graduate students will be 3.6 percentage points more than the 10-year Treasury yield, or 5.41 percent for the 2013-2014 academic year, under the legislation. PLUS loans will be marked up 4.6 percentage points to 6.41 percent.

The original House bill would have forced borrowers to pay a variable interest rate on the total amount owed, capped at 8.5 percent. The measure that passed fixes each year’s loan, letting students lock in their costs.

“Like the 30-year mortgage, once you take out the loan, you know what your rate is going to be so you can plan on it,” House Minority Whip Steny Hoyer, a Maryland Democrat, told reporters July 30.

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