WASHINGTON—The Senate ended a lengthy battle over student-loan interest rates, passing a bipartisan measure to revamp how borrowing costs are set for millions of college students.
The bill, which would tie interest rates on federal student loans to the government's borrowing costs, passed the chamber Wednesday evening by a vote of 81 to 18. All but one of the chamber's Republicans voted "yes," while Democrats voted about 2-to-1 in favor.
The bill must be approved by the House. House Education Committee Chairman John Kline (R., Minn.) said he believed the bill would win "swift passage" in the House. The White House said it backs the deal.
The Senate approval came less than a month after the expiration of a measure that kept the rate on certain federal student loans at 3.4%, allowing the rate to double. Leaders of both parties had vowed to prevent such a jump, but they clashed over several aspects, including where rates should be set for the long term and where to set the ceiling on rates.
In recent weeks, the biggest opposition came from liberal Democratic senators who argued for lower rates than those included in the bill that passed the chamber Wednesday. They called for raising taxes to do so.
Sen. Tom Harkin (D., Iowa) said those Democrats needed to accept the reality that such a deal couldn't be passed in this Congress. He said the Senate bill sets rates as low as possible without adding to the deficit.
"Don't let anybody tell you that this isn't a good deal for students," Mr. Harkin said on the Senate floor moments before the vote. "Would there be a better deal? Well, I suppose. How about free money?"
Under the Senate plan, interest rates for undergraduates would be set 2.05 percentage points above the yield on the 10-year Treasury note. Undergraduates would pay an interest rate of 3.86%, instead of the current 6.8%, on federal loans taken out for the 2013-14 school year.
But loans taken out in subsequent years would likely carry higher rates, because the 10-year Treasury yield is expected to rise as the economy improves. Congressional researchers project that the rate on new loans for undergraduates would be 4.62% for loans taken out next year and 7.25% for loans taken out in 2018. The bill caps the rate at 8.25%.
The deal is projected to bring in $715 million in revenue over 10 years, after expenses, that would be used to reduce the deficit. But the deal's authors, Sens. Lamar Alexander (R., Tenn.) and Joe Manchin (D., W.Va.), said the deal sets rates as low as possible without generating losses for the government. Their aides said it would be impossible to set rates to make revenue exactly zero.
Earlier Wednesday, a faction of Democrats—led by Sens. Jack Reed of Rhode Island and Elizabeth Warren of Massachusetts—sought to pass a measure that would cap interest rates on most federal undergraduate student loans at 6.8%, while raising taxes to pay for it. That measure failed to pass.
Mr. Reed said on the Senate floor that without the caps, the broader measure to tie interest rates to the government's borrowing costs would add more to students' debt than if the Senate did nothing. "This measure will add to that debt," he said.
Write to Josh Mitchell at joshua.mitchell@dowjones.com
A version of this article appeared July 25, 2013, on page A4 in the U.S. edition of The Wall Street Journal, with the headline: Student-Loan Bill Approved by Senate.
