your connection to The Boston Globe

Democrats unveil plan to reduce some student loan rates by half

WASHINGTON -- House Democrats plan quick action to lower interest rates for student loans, but the plan will be significantly scaled back from the party's election-year promises.

Their proposal, scheduled for a vote this week, would cut interest rates on some student loans in half.

However, the interest rate relief would apply only to need-based loans and wouldn't help people who take out unsubsidized student loans -- a distinction not made in the campaign literature Democrats handed out before winning control of Congress last fall.

The measure also abandons a pledge to reduce rates for parents who take out loans to help pay their children's college costs.

The rate cut for subsidized student loans -- from 6.8 to 3.4 percent -- would be phased in over five years.

The measure would cost just under $6 billion, according to the Congressional Budget Office.

"This legislation will be a vital first step toward helping lower college costs for millions of low- and middle-income students, while keeping our promises to taxpayers to maintain responsible spending," said Representative George Miller, Democrat of California and chairman of the committee overseeing education issues. He introduced the bill Friday and said the House would vote on it Wednesday.

To avoid increasing the deficit, the bill's cost would be offset by trimming subsidies the government gives lenders and reducing the guaranteed return banks get when students default. Banks also would have to pay more in fees.

Tom Joyce, a spokesman for Sallie Mae, the student loan organization, said such cuts could impact the services and benefits students receive.

"We do not oppose an interest-rate reduction," Joyce said. "But if the goal is to try to get a low income or middle-income student into a seat, we'd better be careful of the law of unintended consequences."

Education Secretary Margaret Spellings said last week she would prefer that Congress increase Pell grants, which go to the poorest students and do not have to be paid back.

Another Democratic campaign promise was to raise the maximum Pell award from $4,050 to $5,100. Miller said lawmakers will get to that.

An estimated 5.5 million students receive subsidized loans.

A typical borrower with a $13,800 subsidized student loan debt would pay about $22,100 in interest and principal over 15 years at the existing rate. When cut to 3.4 percent, that same borrower would pay $17,700 -- or about $4,400 less -- over the same period, according to Luke Swarthout, who lobbies on higher education issues for US Public Interest Research Group.

Republican leaders pushed a budget bill through Congress last session that cut $12 billion from the student loan programs. Democrats and student groups said the money should have been preserved to help cover college costs rather than redirected toward other priorities.