Senate Approves Deal on Student-Loan Interest Rates, Ending Standoff

July 24, 2013

The Senate voted on Wednesday to undo the increase in student-loan interest rates that went into effect this month and instead to peg rates to the financial markets, bringing a drawn-out stalemate near an end.

The bill that passed, the Bipartisan Student Loan Certainty Act of 2013 (S 1241), was branded by its proponents as a compromise, but it still rankled more than a dozen Democrats, who said future college students would pay for the deal once interest rates rose on the 10-year Treasury note.

Interest rates on new undergraduate loans would sit at 3.9 percent this year instead of the 6.8-percent rate put into effect three weeks ago. The legislation is expected to be approved by the House of Representatives before the August recess and signed into law by President Obama, who spoke out in favor of the bill on Wednesday.

"This is a true compromise," Sen. Tom Harkin of Iowa, who co-sponsored the bill, said on the Senate floor. "I'd suppose if I could write it, I'd write it differently. But we have to deal with the art of the possible."

A Market-Based Formula

The legislation, which passed by 81 to 18, would tie the interest rate on subsidized and unsubsidized Stafford loans to the 10-year Treasury note plus 2.05 percentage points for undergraduates. It also includes an 8.25-percent cap on undergraduate loans, which Senate Democrats had insisted on.

Graduate students would pay the market rate plus 3.6 percentage points on unsubsidized Stafford loans, with a 9.5-percent cap. PLUS loans for parents and graduate students would be tied to the market rate plus 4.6 percentage points, with a 10.5-percent cap.

If signed into law, the bill would end the volleying of proposals by both chambers of Congress over the last two years, which led to the doubling of student-loan interest rates on July 1. That increase would have raised interest payment by about $2,600 for the average borrower over the next decade, a Congressional committee estimated last month.

The debate has centered on how low the federal government should cap rates that fluctuate with the market, and whether there should be a single rate. In recent weeks, Republicans and Democrats have squared off over whether the government should help reduce its budget deficit by using future payoffs of student loans.

The Senate bill resembles one passed in May by the House, which also adopted a market-based formula for setting interest rates. The Congressional Budget Office projected that the Senate bill would cut the deficit by $715-million over the next decade.

Some Democrats Opposed

The bill faced resistance from several Senate Democrats, including Elizabeth Warren of Massachusetts and Jack Reed of Rhode Island, who used the budget office's calculations to highlight the $184-billion in revenue the government could receive from student loans over the next decade.

Ms. Warren and Mr. Reed introduced an amendment on Wednesday that would have capped undergraduate and graduate loans at 6.8 percent while adding a 0.55-percent tax increase on people who earn more than $1-million a year. The amendment was backed by 17 Senate Democrats, but failed to make it into the final bill.

"We're locking ourselves into increasing rates that go way beyond" the current rates, Mr. Reed said on the Senate floor on Wednesday. "The one certainty in this legislation is that rates will go up. Maybe not right away, but they will go up."

Sen. Barbara Boxer of California, who backed the Reed-Warren amendment, spoke out against the Senate bill on Wednesday, citing projections that show future college students will pay about $2,200 more on a $25,000 loan if the interest rate reaches the cap.

"This is a national problem, and part of it is a national disgrace. And what's our solution? A so-called deal that makes it worse," said Ms. Boxer, a Democrat.The Senate also voted down an amendment presented by Sen. Bernard Sanders, an Independent of Vermont, who wanted to limit the bill's reach to two years in order to avert rising interest rates.

Republicans contend that increasing interest rates helps reduce the risk of making loans. Sen. Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, said student loans cost the government more money than the bill's critics say. "I just have to say it's not accurate to say the federal government will make a bunch of money off of it," he said.

'One Part of the Jigsaw Puzzle'

But the bill approved on Wednesday is just "one part of the jigsaw puzzle that is college affordability," Mr. Harkin said on the Senate floor.

Several top federal officials have acknowledged throughout the student-loan debate this summer that a compromise on the issue would not go far toward dealing with the issue of college costs. Total federal student-loan debt surpassed the $1-trillion mark this month.

Congress is also set to take up the reauthorization of the Higher Education Act, the main law governing federal student aid, which is due by 2014. That bill could be another opportunity for lawmakers to tackle rising college costs.

President Obama, who said in a speech at Knox College on Wednesday that he planned to "shake up" higher education, spoke out in favor of the student-loan bill. His plan for higher education, released earlier this year, calls for big changes in accreditation standards and awarding student-aid dollars to colleges based on their performance.

"This week, we're working with both parties to reverse the doubling of student-loan rates that occurred a few weeks ago because of Congressional inaction," he said. "It's all a good start—but it isn't enough."