Sen. Elizabeth Warren did not vote in favor of the bill. Senate passes student loan deal

A hard fought deal to keep student loan interest rates down cleared the Senate Wednesday on a 81-18 vote, despite strong opposition from liberal Democrats who believe it would make skyrocketing student debt even worse in the long run.

The vote represented a significant breakthrough after months of stalemate and weeks of negotiations between the two parties to find a long-term solution on student loans. And it showcased a deep split among Democrats: Many were skeptical about tying students’ interest rates to market rates expected to rise in future years.


The bill ties rates for new student loans to the government’s cost of borrowing, and it reverses the July 1 doubling of interest rates on subsidized loans. The House is expected to act on the measure in the next week, and the Obama administration supports the bill.

The bill sets interest rates this year at 3.86 percent for all new undergraduate Stafford loans, 5.4 percent for graduate Stafford loans and 6.4 percent for PLUS loans for parents and graduate students. The rates are tied to the rate on 10-year Treasury bonds.

If interest rates rise, student rates are capped: undergraduate loans at 8.25 percent, graduate loans at 9.5 percent and PLUS loans at 10.5 percent. That means rates could go higher than they are now before hitting the caps.

The measure closely hews to the Obama administration’s interest rate proposal from earlier this year. But many Democrats would have preferred lower caps on interest rates or an extension of the low, fixed 3.4 percent rate on subsidized loans. Most of the 18 senators voting “no” were Democrats who criticized the bill as unfair to students.

Sen. Elizabeth Warren (D-Mass.) compared the bill’s promise of low rates this year and higher rates in the future to an the interest rate used to lure people into signing up for a new credit card or a subprime mortgage.

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“I cannot support a plan that asks tomorrow’s students to pay more in order to finance lower rates today,” said Warren, who voted against the bill. “We should be doing everything we can to invest in students and offer them the best deal we can on student loans.”

The Congressional Budget Office projects interest rates won’t begin to push up against the bill’s caps for at least four years. Congressional Republicans and others have argued that a cap isn’t necessary because income-based repayment programs exist for students who have trouble repaying their loans after graduation.

But the possibility of undergraduate rates of 8.25 percent alarmed some Democrats, who urged their colleagues to reject the deal. An amendment from Warren and Sen. Jack Reed (D-R.I.) to cap rates at current levels, 6.8 percent for undergraduate loans and 7.9 percent for PLUS loans, had 17 co-sponsors. They excoriated the compromise plan for costing students $715 million more over 10 years than the current law, according to CBO estimates.

Democrats who voted in favor of the compromise emphasized that they didn’t see it as a perfect solution — or a permanent one. Sen. Tom Harkin (D-Iowa) said he intended to reconsider the interest rate when Congress rewrites the Higher Education Act, a process that starts this fall. But the bill’s strongest supporters praised it as a permanent solution and a good deal for students and taxpayers.

“We’re speaking as much to the 10-year-old as we are to the 18-year-old,” Sen. Richard Burr (R-N.C.) said. “We want to provide them with the certainty that there is a student loan program they can participate in that’s equitable and fair.”

The bill offers the biggest rate cut to undergraduates taking out new unsubsidized Stafford loans. Those loans already had an interest rate of 6.8 percent, and most low- and middle-income students who take out subsidized loans also get unsubsidized loans. Congressional Republicans argued that the single rate for undergraduates would make the program more fair and less confusing.

The interest rate on subsidized loans has been a political flash point for two years. That’s in part because it’s the rare lever Congress has to lessen the burden of student debt, which topped $1 trillion last year. If the rate on subsidized loans had been allowed to double, borrowers who took out the maximum amount — $23,000 — would pay slightly over $40 more per month at a 6.8 percent rate compared with 3.4 percent, or about $4,000 more over the life of the loan.

Obama has urged Congress to tackle college affordability on a larger scale. On the Senate floor on Wednesday, Harkin and Sen. Lamar Alexander (R-Tenn.) pledged to do just that in the coming months when the chamber begins rewriting the Higher Education Act.

The House plans to act on the bill within the next week. Speaker of the House John Boehner has praised the compromise, which shares some similarities with a market-based interest rate plan the House passed earlier this year.

“I am pleased we finally have a Senate agreement worthy of public support,” Rep. John Kline (R-Minn.), chairman of the House Committee on Education and the Workforce, said in a statement Wednesday night. “The legislation approved today reflects the policies and priorities of the House-passed Smarter Solutions for Students Act. This is a victory for students and taxpayers, and I look forward to the bill’s swift passage in the House.”

An earlier version of this report misstated the new interest rates for loans. They are 3.86 percent for all new undergraduate Stafford loans, 5.4 percent for graduate Stafford loans and 6.4 percent for PLUS loans for parents and graduate students.