Reed said lawmakers need the extra time to come up with a long-term solution because Congress is not ready to consider the reauthorization of the Higher Education Act.

If Congress doesn’t act by July 1, interest rates on some student loans will double from 3.4 percent to 6.8 percent.

Reed pays for the one-year extension by ending a tax break on tax-deferred retirement accounts. He said that would generate around $4 billion to pay for the reduced student loan rate until Congress came up with a permanent solution.

On Wednesday, a bipartisan group of senators announced an alternative plan, which is a permanent fix.

The “Bipartisan Student Loan Certainty Act” requires that, for each academic year, all newly issued student loans be set to the U.S. Treasury 10-year borrowing rate plus 1.85 percent for subsidized and unsubsidized undergraduate Stafford loans; plus 3.4 percent for graduate Stafford loans; and plus 4.4 percent for PLUS loans. 

The interest rate would be fixed over the life of the loan, and the cap on interest rates for consolidated loans would remain at 8.25 percent. But some Democrats argue that plan is worse than doing nothing since the rates could get higher than 6.8 percent.

House Republicans passed a similar plan, the Smarter Solutions for Students Act. It would set federal student loan rates equal the rate on the 10-year Treasury note plus 2.5 percent. The rate would be variable and would reset each year, although students could package all their loans into a fixed-rate loan after graduation. The GOP bill capped the rate at 8.5 percent for most students.

Senators are likely to debate the two packages when they return from the July 4th recess.