UPDATE: Student loan rate deal hits snag; negotiations continue

July 11, 2013

Update, 9:35 a.m., Friday:

A bipartisan group of senators was close to reaching an agreement Thursday on how to set federal student loan interest rates, but then they learned that their plan could cost the government $22 billion over the next decade. That restarted negotiations yet again. The full story is here.

Original post:

A bipartisan group of senators reached a tentative agreement on Thursday to change the way the federal government sets interest rates for its education loans.

Sen. Joe Manchin (D-W.Va.) was among the negotiators.
Sen. Joe Manchin (D-W.Va.) was among those who pushed for a bipartisan proposal.

The negotiations followed a failed procedural vote on another student loan bill on Wednesday.

The bipartisan group proposes to set the rates based on the market, instead of having a fixed rate for years on end, and to impose a cap to prevent those rates from going too high, according to two aides with knowledge of the negotiations.

Under this agreement, rates for all federal loans for undergraduate students would be tied to the variable rates of the 10-year Treasury bond, plus 1.8 percentage points, according to the aides. Loans for graduate students would be the Treasury rate plus 3.4 percentage points, and loans taken out by parents through a federal PLUS program would be the Treasury rate plus 4.5 percent.

That means for the coming school year, undergraduates taking out new federal loans would see interest rates of about 3.6 percent, while rates for graduate students would be about 5.2 percent and PLUS loans would be 6.31 percent. That's a decrease for everyone. Right now, rates are 6.8 percent for undergraduates and graduate students, and 7.9 percent for PLUS loans.

In future years, the rates would be capped at 8.25 percent for undergraduates and 9.25 percent for all other loans, according to the aides.

All of these numbers are tentative and could likely change when senators receive an analysis from the Congressional Budget Office, which is expected on Thursday, according to four aides with knowledge of the negotiations. A deal has not yet been finalized, but if it is, a vote could come next week.

The bill that failed Tuesday would have granted a one-year extension on the 3.4 percent interest rate on new subsidized Stafford loans, which are largely taken out by low- and middle-income students. That rate expired July 1, returning to to 6.8 percent. Those loans represent about 40 percent of money disbursed by the government in education loans each year.

The new agreement largely mirrors a plan previously introduced by a bipartisan group that included Senators Joe Manchin III (D-W.Va.), Angus S. King, Jr. (I-ME) and Lamar Alexander (R-Tenn.). The six senators who sponsored that legislation met Wednesday evening with Sen. Tom Harkin (D-Ia.), chairman of the education committee, and Majority Whip Dick Durbin (D-Ill.).

Lawmakers have been trying to reach a decision before the August recess, at which point many students will lock-in on loans for the coming school year. White House and Department of Education officials have had lengthy meetings with Senate leaders this week.

Many Democrats have opposed tying loan rates to market rates, saying this could hurt students in the long run. Even though the tentative agreement includes caps on these rates, it signals a retreat by Democrats. The House passed a bill in May that would set these rates according to the market, up to 8.5 percent. Those rates could change over the life of a loan.

 

 

Student loan deal gets hung up on cost

A bipartisan group of senators was close to reaching an agreement Thursday on how to set federal student loan interest rates, but then they learned that their plan could cost the government $22 billion over the next decade. That restarted negotiations yet again.

Jenna Johnson writes about Maryland politics, including the General Assembly, the administration of Gov. Martin O'Malley (D) and the 2014 election.
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