The Senate passed legislation Wednesday that would make it less expensive for college students to borrow money to pay for classes, housing and books. But interest rates could soon start climbing.
The proposal, that passed by 81 votes to 18, would link interest rates on federal student loans to the financial markets. That means student loans for the next few years would have lower interest rates. Higher rates would come in later years if the economy improves as expected.
Liberal Democrats opposed the White House-backed proposal as a bait-and-switch measure that would lure in new borrowers. Republicans supported the measure and helped the bill win passage. The bill is similar to one the House has already passed.
The White House and its allies said the new loan structure would offer lower rates to 11 million borrowers right away and save the average undergraduate $1,500 in interest But there was no denying the new structure could cost future students if the economy improves as expected and interest rates climb. The White House's allies instead suggested the new formula is better than the status quo.
After the bill’s passage the White House released a statement from President Obama applauding the vote.
“This compromise is a major victory for our nation's students,” the statement read. “It meets the key principles I laid out from the start: it locks in low rates next year, and it doesn't overcharge students to pay down the deficit. I urge the House to pass this bill so that I can sign it into law right away, and I hope both parties build on this progress by taking even more steps to bring down soaring costs and keep a good education - a cornerstone of what it means to be middle class - within reach for working families.”
Rates on 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.
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. The bill passed with support from 45 Republicans, 35 Democrats and Sen. Angus King, the independent from Maine who helped negotiate the deal.
Sen. Mike Lee, R-Utah, joined 16 Democrats and Sen. Bernie Sanders, the Vermont independent who caucuses with Democrats, to oppose the legislation.
Sen. Claire McCaskill, D-Mo., did not cast a recorded vote.
"This permanent, market-based plan makes students' loans cheaper, simpler and more certain," said Sen. Lamar Alexander, the top Republican on the Senate education panel. "It ends the annual game of Congress playing politics with student loan interest rates at the expense of students planning their futures."
Under the bipartisan deal, undergraduates this fall could borrow at a 3.9 percent interest rate. Graduate students would have access to loans at 5.4 percent, and parents could borrow at 6.4 percent. Those rates would rise as the economy picks up and it becomes more expensive for the government to borrow money.
The compromise could be a good deal for 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.
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.
Using Congressional Budget Office estimates, rates would not reach those limits in the next 10 years.
But even among those who voted for it, frustrations remained evident.
"The bill that is before us represents a number of compromises that were made on both sides," said Sen. Tom Harkin, the Iowa Democrat who chairs the Senate Health, Education, Labor and Pensions Committee, before the vote.
Harkin said the legislation is not what he would have written if he had the final say but he also said that he recognizes 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. "If we don't pass this today, there will be one sure effect: student loans will be almost twice what they would be under this bill."
Most Senate Republicans who pushed for interest rates to be linked to the financial markets voted for the measure. It was negotiated by Democratic Sen. Joe Manchin of West Virginia and GOP Sens. Richard Burr of North Carolina and Lamar Alexander of Tennessee, the top Republican on the Senate Health, Education, Labor and Pensions Committee.
"They may come from different political parties, but they all really care about students. And this bill proves it," said Senate Republican leader Mitch McConnell of Kentucky. "And there's something else this bill proves, too: That Democrats can work with Republicans when they actually want to do it -- when they check their partisan, take-it-or-leave-it approaches at the door and actually talk with, rather than at, us."
The compromise negotiated in the Senate closely hews to what House Republicans passed this year, and that's a sticking point for some liberals.
Sen. Jack Reed, D-R.I., pushed for an extension of the current 3.4 percent rate so lawmakers could address the subject this fall during the revision of the Higher Education Act. Sen. Elizabeth Warren, D-Mass., has objected to students paying higher interest rates than the Federal Reserve offers to big banks.
"I understand that compromise isn't always pretty, but there isn't any compromise in this bill," Warren said last week when the deal was announced.
"In fact, I think the whole system stinks," she added during a Senate speech.
Sens. Patty Murray, D-Wash., and Al Franken, D-Minn., planned amendments that would redirect any profits made through the bill to help low-income students.
The Congressional Budget Office estimated the bill as written would reduce the deficit by $715 million over the next decade. During that same time, federal loans would be a $1.4 trillion program.
"We've got to get out of the business of making profits of struggling families who want nothing more than to be able to send their kids to college," said Sen. Bernie Sanders, a Vermont independent who caucuses with Democrats. "This legislation only makes a bad situation worse."
The Associated Press contributed to this report.