High Cost Delays Senate Student-Loan Relief Plan a Week

A tentative deal among senators to move student loans to market-based variable interest rates instead of fixed percentages fell apart after budget analysts pegged its cost at $22 billion over 10 years, Senate aides said.

The high price means that Congress won’t be able to act until next week at the earliest to roll back the July 1 doubling of interest rates -- from 3.4 percent to 6.8 percent -- on new subsidized Stafford loans, which are available to undergraduates based on financial need.

The cost estimate from the Congressional Budget Office forced members of the bipartisan group to redraft their plan to tie rates on Stafford and PLUS loans to changes in 10-year Treasury note yields, said Republican and Democratic aides who spoke on condition that they wouldn’t be identified in discussing the private talks.

Earlier yesterday, prospects seemed brighter for the plan. The lead Republican negotiator, Senator Lamar Alexander of Tennessee, said: “We have only one number to get back. I think we have an agreement in principle.”

The deal was dependent on the budget office estimate, which showed how the plan would affect the federal deficit. New variables will be submitted to CBO analysts for another review, aides said.

Rate Caps

A big element in the expense, the aides said, is the caps negotiators placed on the variable rates. The upper limit on Stafford undergraduate loans was set at 8.25 percent; on PLUS loans, which go to graduate students and parents of undergraduates, it was 9.25 percent.

Alexander and other lawmakers have warned that interest-rate caps are expensive. Republicans want to minimize the cost to taxpayers, while Democrats have sought to reduce the profit that the Treasury makes off students financing their education through the loan program.

Lawmakers were unable to agree on a solution to avert the July 1 increase before leaving for last week’s holiday break. The interest rate on unsubsidized Stafford loans, which are available to any undergraduate, was already at 6.8 percent.

Senators redoubled their attempts to find a solution after Republicans on July 10 blocked a Democratic effort to bring up a bill, S. 1238, that would restore the 3.4 percent rate for a year on subsidized Stafford loans disbursed after July 1. Students take out new loans for each academic year.

That followed the Senate Democrats’ failure last month to advance another bill, S. 953, that would have extended the lower subsidized Stafford loan rate for two years. Republicans blocked that measure, arguing that Congress should adopt a long-term solution and peg the rates to 10-year Treasury notes.

Concession to Democrats

Including limits on annual interest-rate increases was a concession to Democrats, who have balked at tying the loans to market benchmarks that fluctuate.

That concept was proposed by President Barack Obama and embodied in a measure that passed the House of Representatives and would link rates to 10-year Treasuries. That bill, H.R. 1911, would charge students 2.5 percentage points more than the yield of the last 10-year Treasury note auction before June 1 of each year and would cap rates at 8.5 percent.

Under the tentative Senate deal that fell apart, the interest rate for all Stafford undergraduate loans, subsidized and unsubsidized, would be set annually at 1.8 percentage points above the 10-year Treasury yield from the last auction before June 1. This year, that figure was 1.81 percent; if the plan’s provisions were effective now, the rate for 11 million students taking out undergraduate Stafford loans this year would be 3.61 percent, the aides said.

Larger Markup

The markup for PLUS loans would be larger under the Senate proposal, the aides said. Those borrowers would be charged 4.5 percentage points more than that Treasury-note yield, the aides said. They currently pay 7.9 percent interest; according to the aides, they would pay 6.31 percent under the Senate compromise.

In addition to Alexander, senators involved in the negotiations included Illinois Democrat Dick Durbin, the Senate majority whip; Iowa Democrat Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee; West Virginia Democrat Joe Manchin; Maine independent Angus King; North Carolina Republican Richard Burr and Oklahoma Republican Tom Coburn.

Burr told reporters earlier this week 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.”

The 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 loan servicers will adjust rates for all affected borrowers, including those who have already received their first subsidized loan disbursement, according to the Education Department.

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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