Compromise near to keep student loan rates from doubling

A compromise is in the works in Congress to end the stalemate over student loan rates that allowed them to double on July 1, from 3.4 percent to 6.8 percent.

The deal, which is similar to the proposal laid out by President Barack Obama in his budget plan, would lower rates on federal Stafford loans, tie interest rates more closely to market prices by pegging them to the variable rates of the 10-year Treasury bond and would cap the rates. The compromise, part of ongoing debate over overhauling the federal student loan program, gives both Democrats and Republicans some of what they wanted.

A bipartisan group of Senators negotiated the agreement Wednesday night and Thursday, after the Senate rejected a Democratic bill earlier that would have extended the 3.4 percent rate for another year. Lawmakers are hoping to finalize changes to the program before loans are dispersed in late August. If they don’t meet that deadline, the 6.8 percent interest rate will remain in effect. The change will not affect current loans.

If the compromise is approved, the interest rate for undergraduates would be set at the 10-year Treasury bill rate plus 1.8 percentage points, and would be capped at 8.25 percent.

Graduate students and parents taking out PLUS loans would pay 3.4 and 4.5 percent over the 10-year Treasury bill respectively, with their interest rate capped at 9.25 percent.

Although the rates would vary from year to year, they would be locked in for the life of each individual loan. The change would not affect current loans.

As of Thursday, under the compromise, undergraduates would pay 3.6 percent, graduate school loan rates would be 5.2 percent and parent PLUS loans would come in at 7.9 percent.

It’s critical to the Democrats that there be a cap on interest rates, said a Democratic staffer who was not authorized to speak on the record. “While interest rates are low now, that won’t be the case forever,” the staff member said.

Democrats had hoped to keep the rate at 3.4 percent for another year in an effort to include interest rates in the reauthorization of the Higher Education Act, the federal law governing federal financial aid programs.

Senators are waiting for an analysis of the agreement from the Congressional Budget Office before taking a formal vote. It would then go to the U.S. House of Representatives.

California students are below the national average of $29,059 in college debt at public universities and $23,065 at private non-profit colleges, according to the Project on Student Debt at the The Institute for College Access & Success. The state ranks 46^th nationwide in average debt at public and private non-profit four-year colleges and universities at about $18,879 per student. It’s slightly lower at the University of California and significantly less at California State University, with an average of about $12,411.

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