On July 1, 2013, subsidized Stafford loan rates doubled from 3.4% to 6.8%. Members of Congress had been scrambling to reach a resolution preventing the increase before the July 4^th recess, but were unsuccessful.  Continued negotiations have now resulted in an agreement that could place the bill on the Senate floor as soon as Tuesday, July 23.  But the agreement is controversial among some Democrats, who were pushing for legislation that would keep student loans at lower rates.  It is possible that the bill will need Republican votes to pass in the Senate.
The compromise ties student loan interest rates to changes in Treasury note rates.  This approach is favored by President Obama and a bipartisan group in Congress.  Others, notably Senators Harkin (D-IA), Reed (D-RI) and Warren (D-MA), support maintaining a flat rate.  They backed a two-year extension of the recently expired 3.4 percent rate, to allow time to build support for an alternative to letting student loan interest rates fluctuate with market forces.  An extension of the current rate was unacceptable to Republicans, who blocked its consideration in the Senate.

Senator Harkin worked with the bipartisan group seeking a resolution, insisting that front-end caps be included, to limit the amount that rates can rise. The compromise legislation (S. 1334), would cap undergraduate loans at 8.5 percent, graduate loans at 9.5 percent, and PLUS loans (for parents of undergrads and for graduate/professional degree loans) at 10.5 percent.  Despite his preference for lower rates, Senator Harkin is expected to vote for this bill.

The bipartisan group of Senators includes Joe Manchin III (D-WV.), Jack Reed (D-RI), Tom Harkin (D-IA), Tom Carper (D-DE), Angus King (I-ME), Lamar Alexander (R-TN), and Richard M. Burr (R-NC).  An earlier plan devised by the group would have cost the Treasury $22 billion over the next ten years, according to an estimate by the Congressional Budget Office (CBO), a number too high to earn Republican support. The House’s version of the bill (H.R. 1911, passed last May) will ultimately raise money for the government, and Republicans have emphasized that they do not want a bill that increases the deficit.  The new compromise, S. 1334, is said to save $715 million over 10 years.  That is not far from the bipartisan group’s goal of making the legislation deficit neutral.

Senator Harkin and the other senators who oppose rates as high as would be allowed under this bill do not see this as necessarily the final student loans outcome, since the Senate will take up the reauthorization of the Higher Education Act in the fall.  But there is considerable pressure on Congress to prevent 6.8 percent loan rates from affecting students as the new academic year starts.

The Senate proposal would tie the student loan interest rates to the auction rate for 10-year Treasury notes, which this year is 1.81 percent.  Added to that would be specific percentage points for undergraduates, graduate students and PLUS loans.  This year, the undergraduate loan interest would be 3.86 percent; graduate loans would be 5.41 percent, and PLUS loans would be 6.41 percent.  The caps on maximum interest would offer protection if Treasury note rates start to rise.

If the Senate passes the bill, conferees will still have to work out the differences between the House and Senate versions.  However, the differences are not very large, and the President supports the Senate plan.

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