Student loan deal: A bad break for borrowers?

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(MoneyWatch) Is the bipartisanstudent loan interest rate legislation, which overwhelmingly passed in the U.S. Senate this week, a good deal for students?

Hardly, opponents contend. Critics, including student advocacy groups and Sens. Elizabeth Warren, D-Mass., and Barbara Boxer, D-Calif., say the bill will eventually make the financial pain far worse for millions of undergraduates and graduate students. The measure, which sailed through by a vote of 81 to 18, calls for interest rates on federal Stafford Loans to drop to 3.9 percent for undergraduates this year, down from than the current 6.8 percent.

Going forward, rates on Stafford Loans would be linked to the 10-year U.S. Treasury, with an additional cushion of 2.05 percentage points for undergraduates. Democrats insisted on an interest rate ceiling, which was set at 8.25 percent.

Grad students would pay the market rate plus 3.6 percentage points for their Stafford Loans, with a 9.5 percent cap. The deal is worse for PLUS Loans borrowers. They must pay the market rate plus 4.6 percentage point, with a ceiling of 10.5 percent.

Critics contend that the rate reduction represents no more than a misleading teaser rate. The Stafford Loan rates for undergrads are projected to exceed 6.8 percent by 2017, while Stafford Loans for grad students are projected to exceed that rate in two years, according to the Institute for College Access & Success, an advocacy. PLUS loans for parents and grad students are expected to top their current high rate of 7.9 percent in three years.

Making a bundle off college borrowers

The real winner in the loan deal is the federal government. The Congressional Budget Office estimates that the government will generate $184 billion in profits from its college loan program over the next decade. Sen. Warren has called these profits "morally wrong" and "obscene."

So what happens to the legislation now? What the Senate passed this week was an amendment to student loan legislation passed by the U.S. House of Representatives. The Senate version now goes back to the House for a vote.

According to financial aid expert Mark Kantrowitz, publisher of education research provider Edvisors, the bill will likely pass the House with more Republicans voting in favor than Democrats. Congress is expected to approve the legislation before the August recess.

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