Senate approves deal to tie student loan rates to financial markets

cooperunion_dec08_DSC_0195In a move which could now be considered shocking, the Senate struck  a bipartisan deal last night to prevent some student loan rates from staying doubled in the short term.

The bill would allow undergraduates to borrow at a rate 2.05 percent above the federal 10-year treasury bond rate, which would amount to an effective 3.9 borrowing rate for students eligible for subsidized Stafford loans next year. But, in a scheme bearing no resemblance to boiling-frog scenarios, since the interest rates are expected to increase as the economy improves, students could see higher rates in future years. The rate will be capped at 8.25 percent.

The interest rates for many federal student loans doubled on July 1 from 3.4 percent to 6.8 percent. Loans taken out since then will retroactively be lowered as well.

The bill was approved in a broad bipartisan 81-18 vote, though 17  progressive Democrats voted “no” on the measure.  Many Democrats initially sought to keep rates fixed at a lower rate. “I cannot support a plan that raises interest rates in the long-term while the federal government profits off them,” Sen. Elizabeth Warren (D-Mass.) said. “This is obscene. Students should not be used to generate profits for the government.”

According to Congressional Budget Office estimates, the federal government would stand to profit $184 billion in ten years with the compromise bill, roughly the same amount as if it kept the 6.8 percent rate.

The Senate bill is similar to one that was already approved in the House. The President and Congressional leaders expect that the differences between the bills to be resolved in time for students to sign loan documents for the fall term.

President Barack Obama  called the compromise “a major victory for our nation’s students,” while others  applauded the market-based discipline of the measure. “This is a prudent and responsible proposal. It’s a best of all worlds for students because they get low rates now and a cap if the rates go higher,” Independent Sen. Angus King of Maine said.

Earlier this summer, GUSA President Nate Tisa (SFS ’14) joined the National Campus Leadership Council to delivering a petition to Congress asking that they keep rates low in light of the student loan crisis.

While it may not be a perfect plan, well, it’s something.

Photo: Michael Fleshman via Flickr (Dec. 8, 2012)

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