Senate Compromise Aims to Avert Doubling of Student-Loan Interest Rates

June 19, 2013

With interest rates on some federal student loans set to double in less than two weeks, a bipartisan group of senators is circulating a proposal that would avert the increase by borrowing from plans offered by President Obama and Senate Republicans, lobbyists said on Wednesday.

The effort, which is being led by Sen. Joseph Manchin III, Democrat of West Virginia, Sen. Tom Coburn, Republican of Oklahoma, and Sen. Angus S. King Jr., Independent of Maine, is being touted as a potential breakthrough in the stalemate over setting interest rates. On Tuesday, the Senate majority leader, Harry Reid of Nevada, told reporters that he'd spent "lots of time" with Democratic lawmakers working on the compromise.

"All are working really hard to try and come up with something that is good for the kids, young men and women, who want to be educated," he reportedly said, adding that "we're not there yet." He said that the secretary of education, Arne Duncan, and the director of the National Economic Council, Gene Sperling, would sit down with Democrats to discuss a solution on Thursday.

Yet it's far from certain that the proposal, which includes a three-tiered, market-based interest rate, could pass a divided Congress. Many Democrats prefer a two-year extension of the current rate, to give them time to set interest rates in the context of the reauthorization of the Higher Education Act, and student groups—a key constituency for Democrats—are insisting that any plan include an interest-rate cap, which the proposal lacks.

The compromise comes two weeks after the Senate rejected competing proposals by Mr. Coburn and Sen. Jack Reed, Democrat of Rhode Island. Both are said to be participating in the bipartisan negotiations, as is Sen. Richard Burr of North Carolina, a co-sponsor of the Republican measure.

According to lobbyists who have been briefed on the proposal, it draws on plans that have been floated in recent weeks by Republicans and the White House. Like those plans, it would tie student-loan interest rates to the market, resetting rates annually but fixing them for the life of each loan. The "markup" over the 10-year Treasury note, a benchmark interest rate, would fall somewhere between Mr. Obama's plan, which would tack on 0.9 to 3.9 percentage points, depending on the type of loan, and the Coburn-Burr bill, which would add three percentage points to all loans. Undergraduates would pay 2.5 percentage points more, graduate students would pay 3.5 percentage points more, and PLUS-loan borrowers would pay 4.5 percentage points more, the lobbyists said.

The proposal is the first to distinguish between undergraduate and graduate students in setting interest rates. Last month the House passed a bill that would reset interest rates on individual loans annually but cap them at 8.5 percent for Stafford loans and 10.5 percent for PLUS loans. Borrowers with Stafford loans would be charged a rate equal to the 10-year Treasury note plus 2.5 percentage points. Those with Parent and Grad PLUS loans would pay two percentage points more.