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Student Loan Bill Gains in the House, Faces Showdown in the Senate

NEW YORK (MainStreet)—A bill to reset interest rates on federal student loans for some undergraduates gained in a House vote yesterday to let interest rates charged to some borrowers float--and likely rise--from year to year.

The Republican proposal passed 221 to 198 in a party-line vote. How it will fare in the Senate, where Democrats have a majority, remains to be seen.

Also see: Will Student Loan Interest Rates Double?

Current legislation, which sets rates at 3.4%, is set to expire on July 1. Unless Congress acts, the rate on government subsidized Stafford Loans, currently held by some 7.5 million students, will jump to 6.8% on July 1, a two-fold increase--but opposition is expected.

The House approved a Republican proposal Thursday to allow interest rates on federal student loans to rise or fall from year to year with the government's cost of borrowing, ending a system in which rates are fixed by law. Stafford Loan rates would be tied to the 10-year Treasury note plus 2.5%.

"Who's going to set interest rates," asked Representative John Kline (R-Minn.), "politicians here or the markets?" A proponent of the bill, Kline is chair of the House Committee on Education and the Workforce. There would be a cap in the Republican proposal, however; 8.5% for Stafford loans and 10.5% for graduate students and loans signed by parents.

Also see: Young Student Loan Borrowers Are Bagging the Home Mortgage and Auto Markets

Senate Democrats want to keep the current rate for at least two years. Senator Kirsten Gilibrand (D-NY) opposes having the market set rates and favors a 4% rate for all student loans.

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