U.S. Senate Passes Student Loan Legislation

Yesterday the  U.S. Senate approved legislation to link interest rates on student loans to the market, which would cut rates in the short term but potentially allow them to rise significantly within a few years.

The vote was 81 to 18.¬† All but one of the Senate’s “no” votes were from Democrats, Republican Mike Lee of Utah was the one “no” from his party. Many of the Democrats voted for an alternative pushed by Sens. Elizabeth Warren and Jack Reed and another proposal that would have sunsetted the proposal before rates were likely to spike.

But with supportive statements issued within minutes of the Senate vote by leading House Republicans¬† and Rep. George Miller, the senior Democrat on the House education panel, the measure seems sure to pass the House. The White House signaled President Obama’s support early Wednesday, virtually ensuring that it will become law.

Under the legislation, student loan rates would reset each July based on the previous May’s auction of 10-year Treasury bills. Undergraduate loans — those that are federally subsidized as well as those that are not — would be set at the Treasury rate plus 2.05 percentage points, while loans for graduate students would be set at 3.6 points above the Treasury rate, and loans for parents at 4.6 percentage points over the T-bill rate. The maximum rate would be capped at 8.25 percent for undergraduate loans, 9.5 percent for graduate student loans, and 10.5 percent for parent loans.

Because the Treasury rate is low now, the rate on undergraduate loans in the 2014 fiscal year would be 3.86 percent (5.41 percent for graduate students, and 6.41 percent for parents) — well below the 6.8 percent rate that took effect July 1.

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