WASHINGTON -- A divided Senate on Wednesday approved a bill to cut new college student loan interest rates, under a bipartisan plan that would tie loan rates to the financial markets, but the fix won't help future borrowers, who could end up paying much higher rates.
The 81-18 vote drew overwhelming support from Republicans, but masked deep divisions among Senate Democrats, 17 of whom voted no. Pennsylvania's senators, Democrat Bob Casey and Republican Pat Toomey, both voted yes.
"This piece of legislation is a long-term fix. It's fair, it's equitable, and it's fiscally responsible," said Sen. Joe Manchin, D-W.Va., who helped negotiate the deal.
This passage follows weeks of negotiation and increasing White House pressure. Education Department staffers camped out in senators' offices, and Mr. Obama summoned key negotiators to the Oval Office for a chat. Republicans in both chambers criticized Senate Democrats for slowing the process.
The bill now heads to the House, which previously supported a similar measure. House Speaker John Boehner, R-Ohio, pledged to take up this version "expeditiously."
Since the White House has already declared its support for the legislation, approval in both chambers would bring prompt relief to undergraduates who otherwise would have paid a 6.8 interest rate on new loans.
Under the new rate structure, loans to undergraduates, graduate students, and their parents under the PLUS program would be subject to a fixed rate tied to the 10-year Treasury note -- specifically the yield on the 10-year note as determined by the last auction held before each June.
Rates for loans taken out after July 1 of this year would be 3.9 percent for undergraduates, 5.4 percent for graduate students and 6.4 for those receiving PLUS loans. The rates would be fixed over the life of the loan. The legislation also would reduce rates for most graduate students' loans, from 6.8 percent to 5.41 percent. Parents borrowing money for dependent children's tuition would pay 6.41 percent for the life of the loan, down from 7.9 percent.
Future borrowers could end up paying much more as Treasury bill rates rise. By some estimates, rates within five years could reach 7.25 percent for undergraduate students, 8.8 percent for graduate students and 9.8 percent for parents. "This provides short-term rate relief, but locks in long-term rate pain for thousands of families and students across the country," said Sen. Jack Reed, D-R.I., who opposed the bill.
In a compromise that pleased many Democrats who had initially been wary of using a rate that fluctuated with the markets, Congress set a cap on all loans: 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for PLUS recipients.
Liberal Democrats said they couldn't support the bill because students would pay more than it costs the government to provide loans. Over the next decade, the government expects to reap $814 billion more than the loan program costs. The Senate bill would add $715 million, according to the Congressional Budget Office. That's a problem for lawmakers such as Mr. Reed and Sen. Barbara Boxer, D-Calif., who said government shouldn't profit on students' backs.
Bill supporters say the $715 million equates to only about $2.76 over the life of each loan.
"If we can get that to zero, we'll take it. We won't take a penny. But that's about as close as we can get, working with the types of numbers we're dealing with," Mr. Manchin said in the floor debate.
The average Pennsylvania student would save about $1,500 over the term of a loan, according to state-by-state data the White House released Tuesday.
But this is not a permanent reform, several senators have said, pointing out these concerns: The plan does not address the $1 trillion in student loan debt that already exists. It does not address the growing cost of a college degree.
"My colleagues who support this proposal say that it will lower interest rates on loans for this year -- and that's all that matters," said Sen. Elizabeth Warren, D-Mass. "Now, that's the same thing credit card companies said when they sold zero-interest credit cards, and it's the same thing sub-prime mortgage lenders said when they sold teaser-rate mortgages. In all of these cases, the bill comes due."
Senate Education Committee chairman Tom Harkin, D-Iowa, said Wednesday that "this discussion will continue" next year, when the Higher Education Act comes up for reauthorization.
Education Secretary Arne Duncan said Tuesday that changing the interest rates is just one step in a larger plan.
In a speech Wednesday at Illinois' Knox College, Mr. Obama said that in coming months he will "lay out an aggressive strategy to shake up the system, tackle rising costs and improve value for middle-class students and their families."
Senate Minority Leader Mitch McConnell, R-Ky., supported the loan bill, calling it a sensible solution that should have been agreed to weeks ago -- before July 1, when loan rates automatically doubled.
"When Senate Democrats check their partisan, take-it-or-leave-it approach at the door, the Senate can pass important legislation that in this case helps all students," Mr. McConnell said in a politically charged statement moments after the vote.
Once the Senate bill becomes law, the new rates would be retroactive to July 1 and affect both subsidized and unsubsidized Stafford loans.
The New York Times and Washington Post contributed. Washington Bureau chief Tracie Mauriello: firstname.lastname@example.org, 703-996-9292 or on Twitter @pgPoliTweets.