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House approves cut in student loan rate

But critics say bill doesn't meet need

WASHINGTON -- The House of Representatives yesterday voted to cut the interest rate on future federal student loans, fulfilling a Democratic campaign pledge even as Republicans and some independent analysts asserted the bill won't do much to bring college within reach of those who currently can't afford it.

The bill, which would gradually reduce interest rates for federally subsidized loans to 3.4 percent from the current 6.8 percent, dramatically lowers the monthly cost of repaying student loans for millions of low-income students. But since the loans don't come due until after graduation, the benefits would go to students who already have their diplomas -- including many with high-paying jobs -- and won't add more money to the pool of government grants and college loans.

"The idea that people are going to college with this [bill] who wouldn't otherwise go, that's not what's happening," said Sandy Baum, a senior policy analyst for the College Board and a professor of economics at Skidmore College. "This is about helping people who are already out of college."

The bill won't hurt low-income students, but the effect would be far greater if the same resources were used to boost the amount of money available through Pell Grants and other need-based financial aid programs, said Joan Becker, associate vice provost for academic support services at the University of Massachusetts at Boston.

"How much students have to pay back over the long haul matters," Becker said. "But the larger question of no increase in need-based aid is the heart of the matter. It's a step in the right direction, but it doesn't get at the most pressing need of our neediest students."

The Democrats' bill, which passed 356 to 71, would cut the interest rate on need-based student loans in half by 2011. The lower rates would not have an impact on any loans issued before July 2007, and the lowest rate won't be available until 2011. There will be no change in interest rates for loans initiated before July 2007.

The bill's $5.9 billion, five-year cost would be covered by cutting subsidies that are guaranteed to lenders who offer federal student loans, and by hiking the fees institutions have to pay on every student loan they make. Democrats touted the fact that the bill would help students without adding to the budget deficit.

About 5.5 million low- and middle-income students receive need-based federal Stafford loans every year, including nearly 100,000 who attend colleges or universities in Massachusetts.

A typical student who graduates from college owing $13,800 on federal need-based student loans -- roughly the national average for such students -- will save $4,400 in interest when the 3.4 percent rate is in place, according to a study by the US Public Interest Research Group. For a student with a similar financial profile entering college this fall, the savings would amount to about $2,300, since the interest rate reduction is gradual.

"Higher education is in crisis," said Representative Joe Courtney, a freshman Connecticut Democrat, citing skyrocketing tuition costs at both private and public institutions. "It's all about reordering the priorities of this country. We are putting students and families first."

The Stafford loan program, the federal government's main loan program for college students, includes both subsidized and unsubsidized loans. The interest rate cut would apply only to subsidized Stafford loans -- need-based loans for which the federal government's backing provides low interest rates and frees recipients from making payments until after graduation.

Other federal loan programs, including loans taken out by parents and Perkins loans, which are heavily subsidized to help the poorest of students, would not be affected by the bill. Most low-income students graduate with a mix of federally- and privately-backed loans, of which subsidized Stafford loans are only a portion.

Critics also warned that the measure could backfire. Some banks could balk at the higher fees they will have to pay and opt out of the student-loan business, while colleges and universities might try to capitalize on the measure and raise tuitions even further, said Brian M. Riedl, a budget specialist at the conservative Heritage Foundation.

"It's an idea that sounds good but will not do what a lot of families are hoping it would do," Riedl said.

Republicans blasted Democrats for not taking further steps -- such as boosting need-based grants and the amount of money available for loans -- to have a real impact on students' ability to attend college.

Representative Pete Sessions, a Texas Republican, said Democrats were engaged in "bumper-sticker politics" that sound good but don't deliver real solutions to problems that matter to students. "Not one additional student will be able to attend college because of this proposal," Sessions said.

GOP leaders backed an alternative bill that would have cut interest rates only for graduates earning annual salaries of $65,000 or less, or those who are serving in the armed forces. The savings could have been used to increase need-based grants and reduce the budget deficit, Republicans said.

House Democrats defended their measure by saying that the bill is only the first step toward making college more affordable. Representative Tim Bishop, a New York Democrat, said students heading to college do consider the debt burden they would face upon graduation before deciding whether they can afford a school.

"High indebtedness scares people off," said Bishop, who spent 29 years as an administrator at Southampton College on Long Island before coming to Congress. "This is the best way -- at least right now -- to try to make college more affordable, and to try to improve access."

It is not clear that the bill will become law. The White House opposes it, saying resources would be better spent providing more grants to low-income students. But the House approved the measure with a veto-proof margin.

In the Senate, Democratic leaders are generally supportive of the House approach but want it to be part of a broader remake of the federal approach to student loans and grants.

Senator Edward M. Kennedy, chairman of the Senate's education committee, wants the interest-rate cut tied to other changes: a boost in Pell Grants, a loan forgiveness program for public servants, and an overall cap on federal student loan payments of 15 percent of a borrower's discretionary annual income. Kennedy, a Massachusetts Democrat, yesterday applauded the House vote and vowed to expand on that bill with his own measure "very soon."