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Changes Likely Coming to Student-Loan Interest Rates

By guest blogger Caralee Adams, cross-posted from the College Bound blog

UPDATE (7:55 p.m.) House approves bipartisan Student Loan Certainty Act Wednesday on a vote of 392-31. Click here for more.

ORIGINAL POST (10:10 a.m.) Lawmakers are edging closer to making a major change in the way student-loan interest rates are calculated.

The U.S. House of Representatives is expected to vote today on the Bipartisan Student Loan Certainty Act, which the Senate passed last week 81-18. House leadership on both sides of the aisle have expressed support for the measure.

The bill would tie federal student-loan interest rates to the U.S. Treasury 10-year borrowing rate, initially translating into lower costs on new loans for college students.

Many consider this a win for students in the short term, lowering rates for undergraduates from the current 6.8 percent to 3.9 percent.

But as the economy improves, as anticipated, interest rates would increase on these loans. This eventual increased cost to borrowers concerns many student advocacy groups, such as the Institute for College Access and Success and US PIRG. Other groups, such as the American Council on Education and the National Association of Student Financial Aid Administrators, have been supportive of the measure.

Under the proposed law, graduate students could borrow at 5.4 percent and parents at 6.4 percent this year. Interest rates would be capped at 8.25 percent for undergraduates, 9.5 percent for graduate students, and 10.5 percent for parent loans.

The Associated Press reports that House Speaker John Boehner, R-Ohio, and Rep. George Miller, D-Calif., have encouraged lawmakers to support the Senate compromise, which contains some changes to the House bill. The House-written student-loan bill passed the GOP-led chamber 221-198, largely along party lines. With changes made in the Senate, including a cap on how much interest rates could climb and locking in interest rates for the life of each year's loan, Democrats were expected to join Republicans and back the bill.

The Obama administration urged passage of the act last week. Advocates of the bill say the new approach to setting rates would save the average undergraduate student $1,500 over the life of a loan and affect 11 million borrowers.

The Congressional Budget Office estimates the bill as written would reduce the federal deficit by $715 million over the next decade.

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