Senate passes deal on student loans

Borrowing for tuition, housing and books would be less expensive for college students and their parents this fall but the costs could soon start climbing under a bill the Senate passed overwhelmingly Wednesday.

Undergraduates this fall would borrow at a 3.9 percent interest rate, down from the current rate of 6.8 percent. Graduate students would have access to loans at 5.4 percent, and parents would borrow at 6.4 percent.

The rates would be locked in for that year's loan, but each year's loan could be more expensive than the last. Rates would rise as the economy picks up and it becomes more expensive for the government to borrow money.

The bipartisan proposal would link interest rates on federal student loans to the financial markets, providing lower interest rates right away but higher ones if the economy improves as expected.

The measure was similar to one that already had passed the Republican-led House and leaders from both chambers said they predicted the differences to be resolved before students start signing loan documents for the fall term.

Liberal members of the Democratic caucus were vocal in their opposition over the potentially shifting rates included in the Senate measure, which passed with support from both parties, 81-18.

Senate Republicans pushed the interest rates to be linked to the financial markets and backed the measure.

Rates on new subsidized Stafford loans doubled to 6.8 percent July 1 because Congress could not agree on a way to keep them at 3.4 percent. Without congressional action, rates would stay at 6.8 percent -- a reality most lawmakers called unacceptable, although deep differences emerged even among allies as to how to remedy it.

The compromise that came together during the last few weeks would be a good deal for all students through the 2015 academic year. After that, interest rates are expected to climb above where they were when students left campus in the spring, if congressional estimates prove correct.

"That's the same thing credit card companies said when they sold zero-interest rate credit cards.  ... The bill comes due," said Sen. Elizabeth Warren, D-Mass, who has built her reputation on consumer advocacy, told The Associated Press.

"All students will end up paying far higher interest rates on their loans than they do now."

Warren was among the liberal Democrats who labeled the White House-backed proposal a bait-and-switch measure that would lure in new borrowers with low rates now but would cost future students. Throughout the morning and afternoon, they stood to oppose the compromise.

More moderate democrats backed the measure.

"Don't let anyone tell you that this is bad deal for students. This is not a bad deal for students. If we don't pass this, students will pay 6.8 percent on their loans. With this bill, they'll pay 3.86 percent. You tell me which is the better deal," said Sen. Tom Harkin, the Iowa Democrat who chairs the Senate Health, Education, Labor and Pensions Committee.

Harkin said the legislation is not what he would have written if he had the final say. But he also said that he recognized the need to restore the lower rates on students before they return to campus for classes.

"It's the best that we can do," Harkin said on the Senate floor.

Sen. Jack Reed, D-R.I. disagreed.

"We can do much better than this," Reed said.

As part of the compromise, Democrats won a protection for students by capping rates at a maximum 8.25 percent for undergraduates. Graduate students would not pay rates higher than 9.5 percent, and parents' rates would top out at 10.5 percent.

Wire services