In a fairly novel turnaround Congress passed a major piece of legislation Wednesday with significant bipartisan support that changes the way interest rates for student loans will be calculated. The Bipartisan Student Loan Certainty Act of 2013 was able to bridge a gap between Democrats and Republicans over the government’s role in regulating financial institutions. The bill passed by an overwhelming majority of 392 to 31.
The fate of the bill has long been in question as both Democrats and Republicans alike tried to find reasons for opposing it, ranging from concerns about protecting students from predatory loan practices among the former to worries about government interference in distorting interest rates.
All federally subsidized Stafford loans will have interest rates that are tied to 10-Year Treasury bonds plus 1.8 percent with a cap of 8.5 percent and 9.5 percent on undergraduate and graduate loan respectively. The federal loan program PLUS would pay the Treasury rate plus 4.5 percent. Roughly, this means individuals taking out new loans after the law passes will pay 3.61 percent for undergraduate loans and 5.21 percent for graduate loans.
Senate negotiators reached a tentative deal this morning to address the student loan interest rate crisis. There now appears to be sufficient bipartisan support to pass legislation similar to a proposal by the Obama Administration that would tie interest rates on federally subsidized Stafford loans to 10-Year Treasury bonds plus 1.8 percent with a cap of 8.5 percent and 9.5 percent on undergraduate and graduate loan respectively. The federal loan program PLUS would pay the Treasury rate plus 4.5 percent. Roughly, this means individuals taking out new loans after the law passes will pay 3.61 percent for undergraduate loans and 5.21 percent for graduate loans.
Democratic leaders had been blocking a similar bill because of worries there was no caps on interest rates tied to federal loans that would protect students against sudden market spikes in interest rates. The measure was one President Obama insisted be part of legislation aimed at helping students. Sens. Joe Manchin (D-WV) and Angus King (I-ME) crafted the compromise after they voted against the Democratic bill for failing to address these worries, and with the support of Sen. Tom Carper (D-DE) garnished enough votes for the legislation to pass, pending a final analysis of the law’s deficit impact by the CBO.
As big banks face the fallout from a global investigation into interest rate manipulation, American and British lawmakers are scrutinizing regulators who failed to take action that might have prevented years of illegal activity
Political officials in London and Washington this week are questioning whether regulators allowed banks to report false interest rates that precipitated the 2008 financial collapse. On Monday, Congress requested information about the role of the Federal Reserve Bank of New York in failing to properly regulate bank interest rates. The Senate Banking Committee on Tuesday also announced it was looking into the issue.
The new focus on regulators, banks, and other financial institutions such as credit rating agencies has intensified in the last two weeks after the British bank Barclays agreed to pay $450 million to resolve a civil case after it was discovered it had been manipulating key interest rates. Regulators accused the bank of improperly influencing these rates to deflect concerns about its capital backing and financial viability.
The Barclays settlement is the first of its kind stemming from an ongoing investigation into the question whether banks set key benchmarks, including Libor, or the London interbank offered rate. Other countries are considering action against more than ten large banks, including JPMorgan and Citigroup. The banks also face civil litigation from cities, investors, and financial firms that contend they lost billions from the misreporting of these key interest rates. Such lawsuits could end up costing the banking industry tens of billions of dollars.
The House Financial Services Committee sent a letter to the New York Fed on Monday seeking transcripts from dozens of phone calls in 2007 and 2008 that took place between central bank officials and executives at Barclays. Among the officials that the Senate Banking Committee plans to question during hearings this month include Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, who ran the New York Fed during the crisis. Geithner has long been criticized by opponents on both the left and right as an insider to the financial mess who has allowed key players off the hook.
The attempt by political officials to reign in financial manipulation by large firms and create more regulation has been hampered by political corruption during a presidential election year where multiple and conflicting constituencies must be satisfied. The Obama administration in particular has been lax to regulate the financial industry, in part, because Wall Street donors were one of President Obama’s largest contributors in the 2008 election.