Senate Passes Student Loan Bill Tying Interest Rates To Bond Market

The U.S. Senate voted Wednesday evening to lower interest rates for college students who take out government loans to pay for their education. The bill, which is expected to become law, lowers the interest rates of government-issued undergraduate student loans to 3.86 percent. The vote was 81 to 18.

The vote came after the interest rate for student loans jumped to 6.8 percent on July 1, but the new rate new rate is retroactive to that date.

To gain the support of Senate Republicans, the bill ties student loan interest rates to the bond market, which could cause them climb in the next few years if the price of 10-year Treasury notes rises. However, the measure caps the rates at 8.25 percent for undergraduates and 9.5 percent for graduates.

The interest rates are expected to generate nearly three-quarters of a billion dollars for the government, according to CNN, with the funds earmarked for deficit reduction.

Although President Barack Obama supported the bipartisan bill, some Democrats opposed it on the grounds that student loan interest rates should not go any higher.

"The truth of the matter is the bill on the floor would be a disaster for the young people of our country who are looking to go to college," Sen. Bernie Sanders (Ind., Vt.) said. "This makes a bad situation worse."

Sen. Tom Harkin (Dem, Iowa), a key supporter of the bill, disagreed. "This fall, all undergraduates, subsidized or unsubsidized, would only have to pay a 3.86% interest rate for the life of the loan," he said "That means real savings for borrowers."

Private lenders are exempt from the bill, which limits loans to no more than $5,500 for first-year students and $7,500 for third-year students and above. The measure only applies to Stafford loans, which the U.S. government uses to give students financial assistance.