Senate Passes Bill Tying Student Loan Rates to Financial Markets

Student Loan Application

July 25, 2013

The Senate yesterday approved a bill that would set student loan rates in accordance with financial markets, USA Today reported. The bipartisan measure passed 81-18, despite heavy opposition from liberal Democrats.

The legislation would retroactively go into effect for student loans taken out on or after July 1, 2013. Interest rates for subsidized Stafford loans automatically doubled to 6.8 percent on this date, since Congress had failed to reach a settlement before the lower rate expired. Rather than setting a fixed rate, the new measure ties Stafford loan rates to the U.S. Treasury 10-year borrowing rate. New rates would be 1.85 percent higher than the treasury rate for subsidized and unsubsidized undergraduate Stafford loans, 3.4 percent higher for graduate Stafford loans, and 4.4 percent higher for parent PLUS loans. Undergraduate students this year can borrow at a rate of 3.9 percent, graduate students at 5.4 percent, and parents at 6.4 percent. Borrowers would see a fixed interest rate throughout the life of the loan.

The bill also set interest rate caps at 8.25 percent for undergraduate borrowers, 9.5 percent for graduates, and 10.5 percent for parents. The Congressional Budget Office, a non-partisan organization, does not expect rates to reach these caps over the next 10 years. Democrats, however, are still worried that interest rates could rise to over 6.8 percent as the economy improves.

Senator Bernie Sanders (I-VT), voted against the bill and voiced his concerns: "The truth of the matter is, if the bill on the floor passes without amendment, it would be a disaster for the young people of our country who are looking to go to college and for the parents who are looking to help pay their bills." Senator Elizabeth Warren (D-MA) also opposed the bill, stating to Bloomberg that the legislation "asks tomorrow's students to pay more in order to finance lower rates today." A few amendments were proposed to address this issue, including one setting a 6.8 percent cap for undergraduate loans and another moving to terminate the variable-rate system in two years. Both amendments, however, failed.

Despite Democrats' concerns with the bill, Senator Mary Landrieu (D-LA) favored it because this "compromise is much better than the original Republican House version." The measure introduced by the House proposed an undergraduate loan rate of 2.5 percent higher than the 10-year Treasury yield and would have reset the rate at which students borrow every year, rather than keeping it fixed over the loan's lifetime.

Among other supporting senators were Richard Burr (R-NC), Joe Manchin (D-WV) and Angus King (I-ME), Reuters noted. King claimed that the bill is "a best of all worlds for students because they get low rates now and a cap if the rates go higher." Senator Lamar Alexander of Tennessee, senior Republican on the U.S. Senate education committee, added, "It ends the annual game of Congress playing politics with student loan rates at the expense of students planning their futures." Both President Obama and Education Secretary Arne Duncan approve of the bill.

USA Today noted that Obama and House Speaker John Boehner praised the bipartisan support behind the legislation. Boehner referred to the measure as a "victory…and one that shows when we have common ground, we should seize it on behalf of the people we serve."

Now that the bill has passed the Senate, it transitions to the Republican-controlled House, which is considered likely to pass the bill before the August recess.

Compiled by Aneesha Jhingan


"Senate approves deal to reverse spike in student loan rates,", July 24, 2013, Elvina Nawaguna

"Senate passes student loan fix,", July 24, 2013, Susan Davis

"Senate Votes to End Fixed Rates on Federal Student Loans,", July 24, 2013, James Rowley

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