Senate Rejects One-Year Return to Lower Student Loan Rate

Talks to broker a compromise on government-backed college financial aid intensified after Republicans blocked a Democratic plan to cancel the July 1 doubling of a loan rate for 7 million low-income students.

A day after White House chief of staff Denis McDonough and Education Secretary Arne Duncan met with Senate Democratic leaders, bipartisan negotiators discussed alternatives to House-passed legislation that would link rates to changes in the yield on the 10-year Treasury note.

“I am optimistic that we can come to an agreement,” said North Carolina Senator Richard Burr, a Republican member of a bipartisan group that has proposed a variable interest rate.

“We’ve got some options that seem to pique a lot of interest in a bipartisan way,” he told reporters.

The rates charged on new subsidized Stafford loans doubled on July 1 to 6.8 percent from 3.4 percent. Today, a Democratic plan to reinstate the lower rate for one year was stopped on a procedural vote. With 60 votes needed to end a Republican filibuster against considering the measure, S. 1238, the vote was 51-49.

Rates for non-subsidized Stafford loans, available to students regardless of income, were already at 6.8 percent.

Senate Democrats failed in an attempt last month to advance legislation, S. 953, to extend the loan rate for two years. Republicans blocked that measure as well, arguing that Congress should adopt a long-term solution and peg student-loan interest rates to the 10-year Treasury note.

The House plan, H.R. 1911, would charge students 2.5 percent more than the Treasury yield and cap rates at 8.5 percent.

Presidential Position

President Barack Obama also proposed tying loan rates to 10-year Treasury note yields. Senate Democrats have resisted the market-based approach so negotiators are trying to find a way to help students manage the risk of higher-loan rates if bond yields increase over time.

Under the bipartisan proposal of six senators, S. 1241, students borrowing both subsidized and non-subsidized Stafford loans would pay 1.85 percent more than the Treasury yield. For this year, that would translate into a 3.7 percent interest rate for all Stafford loans.

Proponents of that bill such as Tennessee Republican Lamar Alexander argue that it would do more to benefit middle-income students because all Stafford loan borrowers taking out undergraduate loans would get the same rate. In addition, more than 80 percent of low-income borrowers of the subsidized loans must take out non-subsidized loans to finance their education.

Upper Limit

Senate Democrats are seeking a cap on the annual increase in borrowing costs.

Negotiators are “trying to find a mutually satisfactory solution,” Maine Senator Angus King, an independent who caucuses with Democrats told reporters after he voted against considering the one-year extension.

A cap on interest-rate increases every year would cost the federal government more money and require higher loan charges, Alexander and other senators said. For that reason, the bipartisan group opted to leave out the cap, Alexander said.

“These things move in tandem, as you lower the cap you raise the rates and vice versa,” Illinois Democrat Richard Durbin said. “To raise the cap you lower the rates. So we are trying to find the right spot.”

The Obama administration has urged that any plan passed by Congress apply to loans disbursed after June 30, according to a July 3 Education Department memo.

If the law is changed, the agency and its servicers will adjust rates for all affected borrowers, including those who already received their first subsidized loan disbursement, according to the Education Department.

Burr told reporters that the Obama administration is pressuring Congress behind the scenes to end the impasse because “the White House would like to have this behind them.”

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net

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