The U.S. House of Representatives passed legislation to cut the interest rate on student loans in half, helping Democrats fulfill a list of campaign promises after taking over Congress.

Lawmakers voted 356-71 today in favor of reducing the rate charged on federally backed college loans over five years to 3.4 percent from 6.8 percent. Democrats said the measure would save students $6 billion. The Senate plans to consider similar legislation as part of a wider student-aid proposal.

House Democrats overcame opposition from banks including Citigroup Inc., which disapproved because the cut in government revenue would be paid for with reductions in payments to lenders. The measure is part of a legislative package that Speaker Nancy Pelosi, a California Democrat, pledged to pass in the first 100 hours after the party took control of the House from Republicans.

``Maybe some of the lenders don't like this bill,'' said Representative George Miller of California, the new Democratic chairman of the House education committee. ``The people who like this bill, and the people who matter, are the students.''

The Bush administration, while not threatening a veto, said earlier this week that it prefers to increase grant assistance instead.

President George W. Bush isn't likely to veto the measure because he's taken that step only once during his presidency, said Moshe Orenbuch, a banking industry analyst at Credit Suisse AG in New York. In that case last year, the legislation would have lifted a restriction on federal funding of embryonic stem- cell research.

The interest-rate reduction first needs to win passage in the Senate, where Democrats plan to rework it as part of a more comprehensive approach to making college more affordable.

Senate Plan

The Democratic chairman of the Senate's education committee, Senator Edward Kennedy of Massachusetts, has a plan that would cut the interest rate while boosting funding for the Pell Grant, the main federal grant to low-income students. His measure also would limit how much students would have to repay each year.

Kennedy hasn't identified all his proposed funding sources, though he has proposed a plan that would save money by persuading colleges to provide federally backed loans directly to their students rather than used the more common system in which banks provide the federally guaranteed loans. Banks also oppose that plan.

The House legislation, drafted by Miller, would pay for the interest rate cut through steps including reducing the return on federal loans by 0.1 percentage point. That cut would apply only to the largest 32 lenders, which hold 90 percent of all student loans.

Lender Payments

The plan also would reduce to 95 cents from 97 cents the amount the government pays lenders for each dollar not paid back by student borrowers; cut to 16 percent from 23 percent the amount that lender agencies can keep from the money they recover in default cases; and double the 0.5 percent fee that lenders pay the government when consolidating a loan.

Those provisions drew the ire of America's Student Loan Providers, the Washington-based lobbying association for 86 lenders, which warned the banks will pass along additional costs they incur under the rate-cut proposal. The group represents lenders including Citibank, Bank of America Corp., Wells Fargo & Co. and SLM Corp., also known as Sallie Mae.

``A strategy of raiding a financial aid program to fund modest proposals is inadequate to the challenge,'' said Kevin Bruns, the association's executive director.

House Republicans made similar charges, calling the interest rate reduction a campaign gimmick that takes five years to bring the rate down to 3.4 percent, before letting it expire six months later.

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By Paul Basken

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Paul Basken in New York at pbasken@bloomberg.net

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