House Passes Bill, Student Loans Tied to Markets

Looks like students might actually see lower interest rates on their loans in time for classes this fall. The House of Representatives has now passed a bill to reverse the jump in student loan interest rates that happened at the beginning of last month.

The bill, which passed 392-31,was approved by the Senate last week.

Student loan rates doubled to 6.8 percent on July 1, after legislators failed to find a bipartisan solution to keep the costs down. The new measure will tie student loan rates to the market, retroactively lowering July's high interest rate.

How does that translate? For a little while, at least, students will have significantly lower interest rates for federal loans. This school year, undergraduates will be able to borrow at 3.9 percent, graduate students at 5.4 percent, and generous parents at 6.4 percent.

Until now, the law required that Congress chose interest rates on subsidized student loans.

"Going forward, the whims of Washington politicians won't dictate student loan interest rates, meaning more certainty and more opportunities for students to take advantage of lower rates," House Speaker John Bohner said.

Tying loan rates to the financial markets has its risks, though. Although things might be more affordable next year, costs will begin to climb as the economy gets stronger. Which means that at some point soon — estimates have it in around 2015 — rates will jump again. And although the bill does have a provision to cap interest rates in the long term, the caps are much higher than current rates — as high as 10.5 percent for parents kind enough to borrow for their kids.

"The bottom line is that students will pay more under this bill than if Congress did nothing, and low rates will soon give way to rates that are even higher than the 6.8 percent rate that Congress is trying to avoid," said Chris Lindstrom, higher education program director.

But legislators are already talking about making some changes to the deal when they begin rewriting the Higher Education Act later this year.

The measure now goes to President Obama for signature.