House approves lower Stafford loan rates

Legislation would cut college debt costs for low- and middle-income students who take out subsidized federal loans.

By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- The House of Representatives on Wednesday voted in favor of legislation that would cut in half the fixed interest rates on need-based Stafford loans for undergraduates over five years.

The bill was introduced last week by George Miller (D-Calif.), chairman of the House Education and Labor Committee.

The College Student Relief Act of 2007 could save the average borrower an estimated $4,400 over the life of the loan, according to the Education and Labor Committee. The average student borrower with need-based loans has an average of $13,800 in debt, according to the Congressional Research Service.

The American Council on Education (ACE) estimates that the provisions of the bill would help approximately 5.5 million low- and middle-income students.

Under the terms of the bill, the rates on new subsidized Stafford loans for college students would fall from 6.8 percent currently to 6.12 percent in 2007, 5.44 percent in 2008, 4.76 percent in 2009, 4.08 percent in 2010 and 3.40 percent in 2011.

The estimated cost of the House bill is close to $6 billion over five years, which would be paid for by reducing the profits and increasing the fees of the top 1 percent of student loan providers that participate in the Federal Family Education Loans (FFEL) program. That top 1 percent of lenders is made up of about 30 companies that provide 90 percent of all student loans.

Not surprisingly, the lenders are less than pleased. They contend that the cuts to their bottom line will have an impact on student borrowers.

"[The bill] would reduce lender yield, impose new fees on lenders making consolidation loans and reduce insurance provided to lenders on defaulted loans. These budget cuts, when coupled with those made last year, risk the ability of lenders to invest in technology, enhance customer service and offer benefits to borrowers," the Consumer Bankers Association said in a statement last week.

In the Senate, however, the bill is unlikely to be taken up as stand-alone legislation. But it is expected to be considered as part of the upcoming debate over the Higher Education Reauthorization Act, said Bill Parsons, ACE's associate director of government relations.

Part of that debate is likely to include a discussion about whether to increase the maximum offered to students by need-based Pell grants to $5,100 from $4,050 per year. The Pell Grant hasn't been changed since the 2002-03 academic year.

Also, Senator Ted Kennedy (D-Mass.), chairman of the Senate Health, Education, Labor and Pensions Committee, has said he would support legislation that caps college graduates' monthly loan payments at no more than 15 percent of their income, forgives loans to graduates who go into public service and extends interest rate cuts to loans made to parents, according to the National Journal publication Congress Daily.

Even if the Senate does approve a similar measure to the House bill on student loan rate reduction, it may face a presidential veto. The White House on Tuesday evening issued a statement opposing the House legislation.

"Reducing student loan interest rates would direct federal subsidies to college graduates, not to students and their families who are struggling to meet current and future educational expenses," the statement said.

In fact, the legislation would apply the lower rates to all subsidized loans taken out by current and future college students during a five-year period starting July 1, 2007. (Unless extended, the legislation would expire in 2012.) So the student who locks in the low rate during school would reduce how much he or she repays upon graduation.

The administration also said it opposed the bill because it would encourage more student debt and noted that the White House would back more grant support for low-income students. Grant money front-loads the aid benefit because it immediately reduces the cost of college for a student, and it is money that doesn't need to be repaid, whereas a large loan, even at a lower rate, can still prove onerous for a student to repay after graduating.

The administration added that the responsibility to provide grant and loan aid must be shared with colleges.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.