Interest rates on student loans would drop for 11 million college students for the upcoming school year but are expected to rise in the future under a market-based rate plan the Senate approved Wednesday.
The vote was 81-18. The agreement on a new rate plan came just in time, before students take out loans for the upcoming school year. Student debt has reached a record of more than $1 trillion as the cost of higher education has shot up.
The bill ties interest rates on all student loans to the 10-year Treasury note plus an additional amount to cover the costs of the loan program, and it caps how high rates can go in the future. The rate on all undergraduate loans for the upcoming school year would be 3.86 percent, down from the fixed rate of 6.8 percent under current law.
The Senate bill will become law if the House of Representatives approves it because it has the support of President Barack Obama. The House already has passed a similar measure.
Sen. Joe Manchin, D-W.Va., one of the bill’s authors, said the average student who was starting college this fall and finishing in four years would save $2,000 in interest over the life of a typical college loan.
However, students in future years would pay more if interest rates rise as they’re expected to do.
Democratic senators who opposed the bill argued that it’s worse for students in the long term than the current policy is and that the caps are too high. The caps are 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for PLUS loans, which are additional loans that graduate students or the parents of undergraduates can use.
Senators voted down two amendments. One, by Sens. Jack Reed, D-R.I., and Elizabeth Warren, D-Mass., would have capped rates at the current levels: 6.8 percent for undergraduates and graduates and 7.9 percent for PLUS. The other, by Sen. Bernard Sanders, an independent from Vermont, would have the market-based rates plan expire in two years.
“The cost of those amendments as judged by CBO is just something we can’t do,” said Sen. Tom Harkin, D-Iowa, the chairman of the Senate Health, Education, Labor and Pensions Committee. He was referring to the Congressional Budget Office.
The Senate bill pegs interest rates to the 10-year Treasury borrowing rate plus 2.05 percentage points for all undergraduate loans. The add-ons are 3.6 points for graduate loans, making them 5.41 percent this year; and 4.6 points for PLUS loans, making them 6.41 percent. The loans also have fees that aren’t part of the interest rates.
The rate for each year would be set in the spring and would be fixed for the life of the loan.
Sen. Richard Burr, R-N.C., who co-authored the bill, said he’d searched for the best reason senators should support it and came up with two words: “financially sustainable.”
He said the plan would ensure that the student loan program would continue, and he argued that it was “equitable and fair.” Although interest rates could rise, “I think the American people can deal with that because it is predictable,” Burr said.
Under current law, rates on subsidized loans doubled from 3.4 percent to 6.8 percent on July 1. Unsubsidized loans already were fixed at 6.8 percent. Most students take out both types of loans.
Opponents of the plan argued that the government was making money on the student loan program when it should be keeping rates lower instead. One federal accounting method showed that the government would profit from the system by $184 billion under current law over the next 10 years. The Senate bill was drafted to be as close as possible to showing no profit or loss compared with the current plan, but it still would earn $715 million over 10 years. Warren said that added up to nearly $185 billion in profits.
“This is obscene,” she said.
But Manchin said that another federal accounting method showed a loss to the government.
The bill directs the Government Accountability Office to provide a clearer account of the cost of the loan program. That information will be taken into consideration next year, when the Senate considers a revision of the Higher Education Act and all aspects of college affordability, Harkin said.
He originally opposed the market-based rate plan but agreed to it after the caps were added.
“Don’t let anyone tell you this is a bad deal for students,” Harkin said before the vote.
Both parties compromised, the Iowa Democrat said:
“That’s the way this place should run: on compromises. Legitimate, yes; hard fought-out, but good compromises. What Sen. Manchin and Sen. Burr have offered is that compromise.”