(Another) Apparent Loan Deal

Compromise would tie federal student loan interest rates to financial market, cap them, and direct some savings to reducing the deficit. Senate approval is not a sure thing.

July 18, 2013

WASHINGTON -- The months-long saga to try to reset the interest rates on federal student loans appeared near an end Wednesday night, as Senate negotiators said they had reached a deal that would tie rates to the market and set the rate for all undergraduate loans at 3.86 percent in 2014.

But then again, the same parties -- led by Democratic Senators Joe Manchin and Dick Durbin and Republicans Richard Burr and Lamar Alexander -- thought they had reached a deal last Wednesday, too, and that one fell through hours later.

According to Senate aides, the new compromise, which builds on the deal that fell apart last week because it did not come close to the budget neutrality that Republicans have made a requirement of the deal, would reset student loan rates each July based on previous May's auction of 10-year Treasury bills. Undergraduate loans -- those that are federally subsidized as well as those that are not -- would be set at the Treasury rate plus 2.05 percentage points, while loans for graduate students would be set at 3.6 points above the Treasury rate, and loans for parents at 4.6 percentage points over the T-bill rate.

The maximum rate would be capped at 8.25 percent for undergraduate loans, 9.25 percent for graduate student loans, and 10.25 percent for parent loans.

Based on the Treasury bill rate for this past May -- which was 1.81 percent -- student loans for the 2014 fiscal year (which begins October 1) would be set at 3.86 for undergraduates, 5.41 for graduate students, and 6.41 for parents.

Over 10 years, the new rates would produce savings of about $715 million, which under the terms of the deal would be put toward reducing the federal deficit. An earlier iteration of the deal would have set the undergraduate rate at 2.1 percentage points above the Treasury rate and saved the government about $2.4 billion over 10 years, but Republicans lowered the rate to win more Democratic support for the measure.

Senate aides said they expected the deal to hold long enough to reach the floor for a vote, probably next week. But whether the compromise will win the 60 votes required for passage is unclear, since it will turn off some liberal Democrats who want the rates to be lower and do not favor use of savings for deficit reduction, and conservative Republicans who don't support the cap, among other things.

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