Senate Crafts a Deal on Student-Loan Interest Rates

July 17, 2013

After months of partisan bickering and finger-pointing, the U.S. Senate is close to considering a bill that would largely undo the recent rate increase on subsidized student loans and change how rates are set on other types of federal student loans too.

The deal, which lawmakers reached on Wednesday, would peg interest rates to U.S. Treasury notes, but cap them at between 8.25 percent (for undergraduates) and 10.5 percent (for PLUS-loan borrowers). Loans to graduate students would carry a cap of 9.5 percent.

Democrats have insisted on a cap as a hedge against rising rates; Republicans have insisted on a single rate for all undergraduate loans, subsidized and unsubsidized. Both conditions are met in the compromise.

Under the deal, undergraduates would pay a rate equal to the rate on the 10-year Treasury note plus 2.05 percentage points. That would come to 3.85 percent for new loans this fall. Graduate students would pay 1.55 percentage points more, and PLUS borrowers another percentage point above that.

The interest rate on subsidized Stafford loans doubled, to 6.8 percent, on July 1, after the Senate failed to reach agreement on a bill to avert the increase.

The latest deal comes a week after another hoped-for compromise collapsed because of its $22-billion price tag. The deal reached on Wednesday is expected to save taxpayers money, though it could cost students more in interest as rates rise.

The bill could come to the Senate floor as soon as Thursday, though a vote next week is more likely.