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From Banking and Finance Law Daily, July 25, 2013

Senate passes “Bipartisan Student Loan Certainty Act of 2013”

By Thomas G. Wolfe, J.D.

By a vote of 81 to 18, the U.S. Senate passed the Bipartisan Student Loan Certainty Act of 2013 (BSLC Act), which aims to amend the Higher Education Act of 1965 to establish interest rates for federal student loans made on or after July 1, 2013. While the BSLC Act would link interest rates for undergraduate, graduate, and other related federal student loans to a market-based formula—centered on the yield of 10-year Treasury bills—the measure also sets caps on those interest rates. Given current market conditions, the BSLC Act would reduce student loan interest rates in the near term while providing a ceiling in the long term when market conditions might change to increase rates.

In addition, the July 24, 2013, amendment by the Senate to the House bill (H.R. 1911) directs the U.S. Comptroller General to undertake a study of the actual cost to the Federal Government of carrying out the student loan program and contains provisions for budgetary treatment of the BSLC Act.

Context and summary. A summary of the BSCL Act indicates that about 11 million students participate in the federal student loan program each year, and the average student loan debt for a college student who graduated in 2011 was $26,600. In connection with interest on federal student loans made on or after July 1, 2013, the BSLC Act provides that: (i) for subsidized and unsubsidized loans to undergraduate students, an interest rate of 3.86 percent is presently operative, and the interest rate cap is set at 8.5 percent; (ii) for unsubsidized loans to graduate students, an interest rate of 5.41 percent is presently operative, and the interest rate cap is set at 9.5 percent; and (iii) for federal PLUS loans to parents and graduate students, an interest rate of 6.41 percent is presently operative, and the interest rate cap is set at 10.5 percent.

Among other things, a chart, comparing current law to the BSLC Act, estimates that the BSLC Act will result in a deficit-reduction savings to the federal government of approximately $715 million over 10 years.

Prior to the Senate vote on the measure, Sen. Elizabeth Warren (D-Mass) delivered a speech on the Senate floor about an alternative Reed-Warren Amendment that would have offered even lower caps than the version of the BSLC Act that actually passed. She noted, “With more than $1 trillion in existing student loans, our students are drowning in debt. We must find a way to address this crisis—by lowering interest rates, refinancing existing student loan debt, and bringing down the cost of college.” Similarly, Sen. Jack Reed (D-RI), also commenting on the proposed Reed-Warren Amendment, asserted that “the Reed-Warren Amendment is a fiscally responsible solution that will cap rates … comparable to what the fixed loan rates are today.”

Congressional reaction to passage. Senator Joe Manchin (D-WVa), one of the principal sponsors of the Senate measure that passed, commented, “In just a few short weeks, students will be returning to school knowing with certainty what their interest rates will be on their loans for the upcoming school year.” While Sen. Jeff Merkley (D-Ore) voted for the BSLC Act, he said that the bill “has one positive feature. It throws a lifeline to our current students by significantly lowering interest rates from current law over the next 3-4 years … Make no mistake, however, this bill does not present an acceptable long-term policy. It charges undergraduate students two percent more than it costs the government to borrow the funds. Graduate students and parents will pay an even higher premium. This turns student loans into a money-making enterprise for the government, with estimated profits of $184 billion over the coming ten years.”

On the Republican side of the aisle, Sen. Jerry Moran (R-Kan) noted, “In the interest of students, parents and taxpayers, I am pleased to support an agreement to address the July 1, 2013, student loan rate hike … This legislation provides much-needed certainty and savings to all students and families who are working to invest in their futures through higher education. In contrast to current law, this solution lowers rates for all students taking out new federal student loans, while saving taxpayers more than $700 million over the next decade.”

Meanwhile fellow Sen. Mitch McConnell (R-Ky) stated, “This is an issue that should’ve been a bipartisan slam dunk as proposals put forward by both the President and Congressional Republicans were strikingly similar. Unfortunately, many Senate Democrats were more intent on prioritizing politics over helping students and the President didn’t fully engage on this issue until after the deadline had passed. This bipartisan bill is what should’ve been agreed to weeks ago—a permanent reform, not a temporary fix. This important reform takes the decisions on interest rates out of the hands of politicians and protects both the taxpayer and students.”

Next step. Now that the Senate has passed the BSLC Act, the measure heads back to the House of Representatives. According to Jon Tester (D-Mont), the measure is expected to pass and become law.

LegislativeActivity: ConsumerCredit InterestUsury Loans

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