Student Loan Bill Enacted
Student Loan Bill Enacted
On July 1, student loan rates doubled because Congress failed to agree on legislation to avert the scheduled increase. After a month of proposals and counter-proposals, Congress enacted a solution that would result in undergraduates paying 3.86 percent interest, close to the 3.4 percent students were paying before July 1, and much less than the 6.8 percent loan rates had risen to after the lower rate expired.
In May, the House approved the Smarter Solutions for Students Act (H.R. 1911) which pegged interest rates on student loans to the market and allowed those rates to change over the lifetime of the loan. Because this legislation would have let interest rates rise too much, President Obama announced that he would veto the legislation if it reached his office. On Wednesday July 24, the Senate amended H.R. 1911, tying interest rates to market rates, but with fixed rates for the lifetime of the loan. The Obama Administration supported the Senate’s version. On Wednesday July 31, the Senate’s amended version passed easily in the House by a vote of 392 to 31. With that vote on final passage, the bill was sent to President Obama on August 1. The President, who has already expressed his support, is expected to sign the bill.
This year, with the new legislation in place, undergraduates would pay an interest rate of 3.86 percent, graduate students would pay a rate of 5.41 percent, and PLUS loan users – graduate students and parents of students – would pay a rate of 6.41 percent. All of these rates are lower than the existing fixed rates of 6.8 percent for Stafford loans and 7.9 percent for PLUS loans. The enacted bill will adjust the rate in future years based on changes in the 10 year Treasury note, but limits undergraduate loan rates to 8.25 percent, graduate loan rates to 9.5 percent, and PLUS loan rates to 10.5 percent.
A group of senators opposed the bill because of its market-based approach to student loans, which will lead to higher rates than students were paying before July. Senators Warren (D-MA) and Reed (D-RI) sponsored an unsuccessful amendment to keep the flat rate of 3.4 percent for another year, leaving time for further negotiations on how to keep rates low. After this amendment failed, 16 Democrats and one independent voted against final passage. Originally, Sen. Tom Harkin (D-Iowa), chair of the Health, Education, Labor and Pensions Committee, was in favor of this freeze, but eventually came to support the bipartisan compromise.
The Democratic opposition argues that the bill does not offer a permanent solution to fix the student loan crisis. The plan fails to address the existing $1 trillion student loan debt, the ever increasing tuition fees, and government’s profits from these loans. (The Congressional Budget Office estimated that the Senate bill would generate $715 million in federal revenue over 10 years, less than the original House version.) Further, while the compromise may lower interest rates on student loans below 6.8 percent in the next two to three years, in the long run the new system may increase rates.
The bipartisan group of Senators that passed the compromise pleaded for the support of the Democratic opposition, claiming that any action is better than inaction and the discussion on student loans would continue, especially because the Higher Education Act is scheduled for reauthorization next year.