A bipartisan plan was recently passed in the U.S. Senate to reform student loan interest rates, but the long-term impact it will have on students is not yet clear.
The Bipartisan Student Loan Certainty Act, a bill that will decide interest rates for all federal student loans by tying them to market rates, passed in the Senate on Wednesday in an 81-18 vote.
The bill is the result of Congress’s efforts to find a long-term fix to the federal student loan program after interest rates on subsidized Stafford loans doubled to 6.8 percent on July 1. Interest rates for subsidized loans doubled when previous legislation expired. Though unsubsidized Stafford loans and PLUS loans were unaffected by the lapse of that legislation, the Senate’s latest plan encompasses these as well.
The bill, if passed by both chambers of the legislature, will tie student loan interest rates to the yield on the 10-year Treasury note and add a markup depending on the type of loan.
With the current bill, rates for undergraduates taking out loans this year would be 3.86 percent, while graduate students and parent borrowers’ rates would be around 5.4 and 6.4 percent respectively, according to media reports.
However, interest rates on the loans are expected to rise in tandem with rates on the 10-year Treasury note as the economy improves, which has opponents of the bill criticizing it for being a guaranteed long run increase in student loan rates.
The Senate bill caps rates at 8.25 percent for undergraduates, 9.5 percent for graduates and 10.5 percent for parent’s taking out PLUS loans, according to Reuters.
“For families with multiple children who are college bound, their childrens’ education become more expensive in each ensuing year,” Sen. Tammy Baldwin (D-Wis.), who voted against the bill, said on the floor of the Senate. “And this means that under this plan a current freshman in college may get a decent student loan interest rate for a few years, but a current freshman in high school will end up with rates much higher than the cap contained in current U.S. law.”
Many senators also disagreed about how much, if at all, the government would profit from the projected loan rates.
Sen. Jeff Merkley (D-Ore.) said that the interest rates would generate a profit of $185 billion after subtracting the administration costs and risk of defaults on loans.
Sen. Jeff Sessions (R-Ala.) disagreed, adding that different accounting methods produce greatly different estimates.
Sen. Tom Harkin (D-Iowa) backed the bill, saying it comes as close to being deficit neutral as possible.
Two amendments to the legislation were defeated in the Senate.
One, cosponsored by senators Jack Reed (D-R.I.) and Elizabeth Warren (D-Mass.), would have locked rates at their current levels of 6.8 percent for undergraduate and graduate loans and 7.9 percent for PLUS loans and footed the cost with a 0.55 percent surcharge on income of more than $1 million.
A second amendment, proposed by Sen. Bernie Sanders (I-Vt.) would have placed a sunset on the bipartisan bill after two years.
Sen. Harkin said that the amendments sounded good, but were impracticable given fiscal realities, and urged his colleagues not to vote for them.
“I say to my friends on the Democratic side, don’t let the perfect be the enemy of the good,” Harkin said.
The Senate bill must be reconciled with a similar bill passed earlier in the U.S. House of Representatives before it can become law.
A major difference between the Senate bill and the one in the House is the Senate bill provides a fixed-rate loan at the time of origination while rates based on the House bill fluctuate throughout the life of the loan.
President Barack Obama and Secretary of Education Arne Duncan have endorsed the bill, which they say would save students taking out loans this year $1,500 in interest on average.
