No Deal on Loans

June 28, 2013

WASHINGTON — It was a scenario that's become depressingly familiar for higher education in recent years: a race against the clock as a predetermined deadline loomed, with financial aid for thousands of students hanging in the balance. On Thursday, though, the clock ran out: the Senate's failure to reach a deal to avert an interest rate hike for federally subsidized student loans means the rate will double Monday.

As the July 1 deadline approached, Congress remained deadlocked. The Obama administration and Congressional Republicans supported a long-term change to how interest rates are determined for all federal student loans. Those plans differed in the particulars, but both would have tied interest rates to market rates, allowing them to rise without a cap as interest rates go up in the broader economy. Congressional Democrats pushed for a one- or two-year extension of the current 3.4 percent interest rate for subsidized student loans, arguing that the issue should be settled when Congress debates broader higher education legislation in the coming years.

In the end, a last-ditch attempt at compromise from a group of senators that included representatives of both parties, but not the Democratic leadership of the Senate Committee on Health, Education, Labor and Pensions or the Senate as a whole, couldn't attract enough bipartisan support for a vote -- and even if it had, there's no guarantee that the House of Representatives, which passed its own plan weeks ago, would have gone along.

The failure to vote on a plan before the Senate adjourned for its July 4 recess Thursday night means that interest rates on new, federally subsidized loans will double to 6.8 percent Monday. Subsidized student loans are awarded based on financial need, and interest doesn't accumulate while students are enrolled in college. (Unsubsidized loans, which are available to all undergraduates, already have an interest rate of 6.8 percent.) The increase was long-planned: it was originally supposed to happen last year, the result of legislation passed in 2007 that gradually lowered interest rates for five years, but an election-year coalition of student advocates and the Obama campaign successfully pushed for a one-year extension.

This year, the rare agreement between the Obama administration and Congressional Republicans on switching to a market-based rate led many observers to believe that compromise was possible. But the issue got bogged down in Congressional deadlock as Democrats pushed for capping interest rates or extending the current rates, while the House passed a plan that the Obama administration threatened to veto.

Whether students will actually pay the new rate -- which applies only to new, federally subsidized loans -- is unclear. On Thursday, Senator Tom Harkin, the Iowa Democrat who chairs the education committee, said that he wanted a one-year fix that would apply retroactively. Since the federal government is the lender for all new student loans, Congress could adjust interest rates after the fact. But where the money will come to pay for the extension, which last year cost $6 billion, is an open question.

Student groups and borrowers' advocates criticized Congressional inaction Thursday night. 

"With the July 1 deadline just five days away, time is almost up for the millions of students who rely on these loans to afford an education. Congress needs to take action to protect students and prevent rates from doubling," said Carmel Martin, a former assistant U.S. education secretary who is now executive vice president for policy at the Center for American Progress, said in a statement. "It is outrageous for the federal government to charge students twice as much at a time when interest rates are at historic lows."

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