Student loans: Senate to vote again after interest rate hike

The Senate is planning to vote Wednesday on a plan that would return the interest rates of subsidized federal student loans to 3.4 percent for another year.

The rate doubled on July 1 after the Senate failed to agree on a plan to freeze rates or keep them affordable.

The fight has been ugly on both sides of the aisle, each criticizing the other for not doing what's best for students.

"They've been more involved in internal bickering rather than actually addressing the issue," said House Republican Conference chairwoman Rep. Cathy McMorris Rodgers. "And the students that are surrounded with us today -- they're all suffering because of it."

Most student loans are issued in August or September, just before classes begin. If the Senate can get a bill passed by then, only students that borrowed money for summer school -- a much smaller percentage -- will be affected by the increase.

The roadblock in the debate is where to set interest rates, and whether there should be a cap.

"We don't believe that the federal government should be charging students higher interest rates to pay down the federal deficit," said Rory O'Sullivan of the Young Invincibles. "In that case, you're essentially trading government debt for student debt."

But there is a risk with setting a cap, as it can become expensive as the market changes. The Senate also wants to keep the loans budget-neutral, which means they should charge slightly higher rates to break even.

Some Senate Democrats are pushing for a short-term extension of the old low rates, while a bipartisan group is looking to pass a variation of the deal that would manage the rates in the long term by linking interest rates to the bond market.

Under the bipartisan proposal, rates on the federal Stafford loans could surpass 6.8 percent by 2017, based on projections. No caps on loan rates are included in that proposal, however, which would reduce costs for the federal government.