White House, Senate Agree to Cut Student Loan Rates

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by Charles Dervarics

Interest rates for student loans will be reduced to 3.86 percent.

Interest rates for student loans will be reduced to 3.86 percent.

The Senate and the Obama administration have reached an agreement to keep undergraduate interest rates low for current borrowers, although critics say it will not prevent students from paying higher rates in the future.

The latest compromise would reduce rates on new subsidized loans for undergraduates to 3.86 percent. That rate had doubled on July 1 to 6.8 percent after lawmakers were unable to agree to extend the old framework, in which Congress set interest rates.

The new agreement is the latest development in an interest rate saga that has lasted for several years. During this debate, many Democrats had continued to argue for Congress to set rates, while Republicans wanted to move to a market-based system. Many consumer and student groups liked the old system, arguing that interest rates are likely to rise soon and leave low-income students unable to handle the rate increase amid rising levels of debt.

Advocates for the compromise said the measure will help students and families.

The agreement is “a major victory” for college students, said U.S. Education Secretary Arne Duncan. “If enacted, the plan would cut rates on nearly every single new college loan this year offering relief to nearly 11 million borrowers.”

He said the typical undergraduate would save more than $1,500 in interest over the life of a loan. “Keeping student interest rates low is just part of our country’s commitment to placing a good education within reach for all who are willing to work for it.”

Sen. Tom Harkin, D-Iowa, chairman of the Senate’s education committee, also praised the agreement because it keeps rates low now and includes a provision that the undergraduate rate cannot exceed 8.25 percent, regardless of market rates. “This proposal includes the necessary caps on individual student loan interest rates to protect students should interest rates skyrocket in the future,” he said.

The compromise passed the Senate by an 81-18 vote, and the House is likely to vote on the measure within the next week. Rep. John Kline, R-Minn., chairman of the House education committee and a strong supporter of market rates, praised the compromise and said he looked forward to its “swift passage” in the Republican-controlled House.

In addition to the 8.25 percent cap on undergraduate loans, rates for graduate students would be capped at 9.25 percent. Rates on parent loans would not exceed 10.25 percent.

Rates for all of these loans would be tied to 10-year U.S. Treasury notes plus small increases to offset potential loan defaults. For the short term, rates on graduate and parent loans would be 5.4 percent and 6.4 percent, respectively, based on Senate documents.

Despite praise from many quarters, some education groups are skeptical of the plan, saying it will lock in place a long-term interest rate hike that students cannot afford.

The compromise is “more a missed opportunity than a cause for celebration,” said Lauren Asher, president of The Institute for College Access and Success. “While Senate Democrats succeeded in including caps on how high rates can rise, the agreement is still projected to cost students more, not less.”

Asher added the bill “locks in” long-term increases that will cost borrowers another $715 million while promoting a loan system already projected to generate $184 billion in profit for the government.

The plan also came under criticism from Chris Lindstrom, U.S. PIRG higher education director. “The bottom line is that students will pay more under this bill than if Congress did nothing, and low rates will soon give way to rates that are even higher than the 6.8 percent rate that Congress is trying to avoid.”

Some Democratic liberals such as Sen. Elizabeth Warren, D-Mass., voted against the compromise. “My colleagues who support this proposal say that it will lower interest rates for students this year, and that’s all that matters,” she said. “That’s the same thing the credit card companies said when they sold zero-interest credit cards and the same thing subprime mortgage lenders said when they sold teaser rate mortgages. In all these cases, the bill comes due.”

If approved by the House as expected, the lower rates would apply retroactively to all new loans issued after July 1.

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