Senate bill ties tuition loan rates to economy

WASHINGTON -- 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 yesterday.

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 expected the differences to be resolved before students start signing loan documents for fall term.

Liberal members of the Democratic caucus were vocal in their opposition over the potentially shifting rates in the Senate measure, which passed with support from both parties, 81-18. "We can do much better than this," said Sen. Jack Reed (D-R.I.).

Undergraduates this fall would borrow at a 3.9 percent interest rate. 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.

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.

The compromise that came together during the past few weeks would be a good deal for all students through the 2015 academic year. After that, interest rates are expected to climb, 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.).