Bipartisan Negotiations Under Way For Student Loan Interest Rate Reform

Credit: The Washington Post

With only 10 days until the deadline, a bipartisan group of senators has begun working on a compromise that would stop interest rates from doubling from 3.4 to 6.8 percent on subsidized Stafford loans come July 1.

The plan, which is under negotiation, would create a three-tier system for undergraduate, graduate, and PLUS loans with rates tied to the 10-year Treasury note. Once a loan is taken out, the interest rate would be locked for the span of the loan. According to USA Today, if the rates were set today they would be 3.81 percent for undergraduate loans, 5.31 percent for graduate loans, and 6.31 percent for PLUS loans

Sen. Tom Harkin (D-IA), one of the senators helping negotiate the plan, stressed that a cap on interest rates would be necessary in a final bill. “A cap is not negotiable. We have to have a cap,” Harkin said to USA Today.

President Barack Obama’s initial proposal and the House Republicans’ bill are strikingly similar to the plan under negotiation. Obama’s plan also ties interest rates to the 10-year Treasury note and locks in that rate when the loan is taken out, although it does not include a cap. His plan would have also expanded the Pay As You Earn program, which gives borrowers the option of monthly payments equal to a low percentage of their incomes. The Republicans’ plan also ties rates to the 10-year Treasury note and has a cap of 8.5 percent. Their plan, however, creates revenue that would be used to pay down the deficit, something Democrats have objected to and the White House has threatened to veto. It also resets the interest rate every year, which could lead to higher and higher rates.

Wednesday, Rep. Nancy Pelosi (D-CA), along with other Democratic representatives, held a press conference to denounce the Republican plan that passed in the House and promoted the Democrats’ plan, which Senate Democrats had already proposed but failed to pass. Their plan extended the 3.4 percent rates on subsidized loans for two years with options for refinancing but would have been cost-neutral as it also closed three tax loopholes that would offset the cost of extending rates.

If an agreement cannot be made, rates will double on more than 7 million borrowers at the same time that outstanding student debt has reached a historic amount of more than $1 trillion. Students are also seeing huge jumps in tuition, which rose 8.3 percent at public colleges and universities in 2012, leaving them desperate for funding.

Kirsten Gibson is an intern for ThinkProgress.