Congress May Undo The Student Loan Interest Rate Hike After All

After months of emotion-filled debate, the Senate passed a bill that will provide a permanent solution to fluctuating student loan interest rates. Earlier this month, the interest rates on subsidized Stafford loans for low-income undergraduate students doubled from 3.4 percent to 6.8 percent. The change added about $1,000 to each subsidized Stafford loan students hold, according to White House estimates. Under the current law, the interest rate on all undergraduate Stafford loans, subsidized or unsubsidized, is currently fixed at 6.8 percent, while graduate and parent Plus loans are fixed at 7.9 percent. As of now, rates on student loans are set by Congress every year.

In an 81 to 18 vote, the Senate approved the Bipartisan Student Loan Certainty Act which, if it passes the House, will permanently tie undergraduate subsidized and unsubsidized Stafford loans to the rate of a 10-year Treasury note plus a 2.05 percent markup, with an interest rate cap of 8.25 percent. If enacted, that would reduce interest rates on undergrad loans by about half for this year. Federal Stafford loans for graduate students would have a 3.6 percent markup with a maximum rate cap of 9.5 percent while Plus loans would have a 4.6 percent markup with a rate cap of 10.5 percent. That would reduce rates for borrowers by about 1.5 percent for next year.

"The interest rate deal was a triumph for students," says Clare McCann, an education policy analyst with the New America Foundation, a nonprofit nonpartisan think tank based in Washington, D.C. "All students will see their rates lower next year and it's not just another one-year fix that only lowers rates for some students for some amount of time. This is a permanent fix."

The White House estimates that the bill would save a typical undergraduate borrower, who borrows $6,922, about $1,500 over the tenure of their loans and the average graduate student, one who borrows $25,666, about $2,900. A full list of the average savings per state is available on WhiteHouse.gov. Critics argue that the bill would actually end up costing students rather than boosting their bank accounts. Interest rates on federal loans will be cheaper for students for the next few years but will most likely increase beyond their current levels as rates on Treasury notes rise.

"Eventually rates will likely go up, which would probably be a good thing given that that would mean that the economy is improving," McCann says, adding that the loan caps will prevent rates from rising too high.

Many aren't convinced that the bill does save money. In an interview with Bankrate last week, Chris Lindstrom, higher education program director for the U.S. Public Interest Research Group, and Lauren Asher, president of The Institute for College Access, slammed the bill for increasing costs for students over the long haul. Asher, who favored a freeze to the 3.4 percent subsidized Stafford rate over the bill, added that she believes the bill is too narrowly focused on loan interest rates and doesn't address student debt comprehensively enough.

According to GovTrack, a similar bill passed the House back in May. McCann says she expects the House to approve the amended bill within the next week.