House Approves Bill To Cut Interest Rate On Student Loans By Linking It To Bond Market

A bill to reduce interest rates on new federal student loans won the approval of the U.S. Congress, when the House, on Wednesday, voted 392-31 in favor of the bipartisan measure, a week after it was passed by the Senate.

The bill's approval, which was stuck for weeks, follows the doubling of the interest rate on Stafford loans -- to 6.8 percent from 3.4 percent -- on July 1, after a subsidy on interest rates expired on June 30.

The bill, which now has to be signed into law by President Barack Obama who supported the bill despite resistance from some Democrats, will limit the rate of interest to 3.86 percent on new federal Stafford loans availed this fall by undergraduates, while graduate students can borrow at 5.4 percent, and parents can get a loan on behalf of their college-going children at the rate of 6.4 percent, Reuters reported.

The bill ties student-loan interest rates to the 10-year Treasury note yield, which means interest rates that are low at present due to a weak economy, could climb in the future based on the bond market's movement. According to the bill's provisions, the interest rate for undergraduate loans will be calculated as the yield on the 10-year Treasury note plus an additional 2.05 percentage points, while the interest rate on graduate student loans will be pegged at 3.6 percentage points over than the 10-year note yield.

However, the bill caps interest rates on loans from climbing higher than 8.25 percent for undergraduate students. The cap for graduate students is set at 9.5 percent and the interest-rate limit on loans availed by parents for their children would be 10.5 percent. The rates would be fixed over the life of the loan.

The Senate voted 81-18 to pass the bill on July 24, despite opposition from some liberal Democrats, who argued that the bill is not sufficient to shield students from rising interest rates in the long term.

Outstanding student loans are currently estimated to total about $1 trillion, of which $864 billion is outstanding federal student loan debt. The remaining $150 billion is in private student loans, which are not supported by the federal government, according to government figures.