The U.S. House of Representatives on Wednesday ended a prolonged debate in Congress with an overwhelming 392-31 vote supporting the Senate’s plan to rework student loan interest rates.
The Bipartisan Student Loan Certainty Act of 2013 overhauls how millions of new student borrowers will pay for their college education. Senators passed the plan on July 24 and President Barack Obama, who previously voiced support for the proposal, is expected to sign the bill into law.
Retroactive to July 1, the proposal ties student loan rates to the government’s 10-year Treasury note. Students can expect a 3.86 percent interest rate on subsidized and unsubsidized Stafford Loans for the upcoming academic school year. That rate likely will climb during the following years as the financial markets improve and the rates on Treasury bills rise.
The act also modifies the rates on other student loans. Graduate students will pay loans at 5.41 percent; and PLUS Loans for parents and grad students will be set at 6.4 percent. The legislation caps undergraduate loans at 8.25 percent, graduate loans at 9.5 percent, and PLUS Loans at 10.5 percent. The rate on Perkins Loans for student borrowers who demonstrate financial need stays at 5 percent.
The interest rate change will not affect any former student borrowers — approximately 37 million Americans — who owe the federal government and private lenders more than $1.1 trillion in outstanding loans, exceeding the nation’s total credit card debt for the first time.
Student Loan Rates Doubled on July 1
Lawmakers allowed the student loan interest rates on new subsidized Stafford Loans, on which the government pays the interest while the student is in school, to double from 3.4 percent to 6.8 percent on July 1. The unpopular rate hike would have remained in effect if lawmakers did nothing and neither party wanted to face angry students and parents when Congress takes a recess next week.
Wednesday’s vote comes on the heels of a failed short-term fix, proposed by the Senate three weeks ago, that would have rolled back interest rates on subsidized Stafford Loans to 3.4 percent for one more year, giving legislators time to address the issue of student loans and rising college tuitions in a more comprehensive way. That measure failed with a vote of 51-49 because it did not meet the 60-vote approval threshold.
Several amendments to the final Senate bill also failed to gain enough support during floor debate, including one that would have capped the interest rate on Stafford Loans at 6.8 percent and another that would have sunset the legislation in two years. Senators who voted against the bill’s final passage claimed that while it would lower the cost of borrowing for current and new college students, it would penalize those students now in middle and high school who will likely be borrowing at higher rates when they begin their college careers.
Sen. Elizabeth Warren, D-Mass., who had preciously introduced legislation that would have lowered rates to 0.75 percent – the same rate that the county’s biggest banks can borrow from the Federal Reserve – said she could not “support a proposal that squeezes even more profits out of our kids.”
According to the a report by the Congressional Budget Office (CBO), the new law is expected to generate a profit of $185 billion for the U.S. Department of Education over the next 10 years as student borrowers repay their loans. The government estimates it will lend approximately $1.4 trillion over the decade.
More than 11 Million Student Borrowers Affected
The latest CBO projections also show that 11 million students will take out $28 billion in subsidized Stafford Loans and $59 billion in unsubsidized Stafford Loans in 2013.
The lower rates should save the average undergraduate approximately $1,500 in interest charges this year. Interest rates on federal student consolidation loans, which allow borrowers to bundle multiple student loans into one package under one rate, could also be lower for new borrowers if they graduate with sizable student debt loads and then decide to consolidate.