Senate Student-Loan Plan Falls Apart Over Cost, Aides Say

A tentative deal among senators to move student-loan interest rates to a market-based variable rate instead of fixed percentages fell apart after the plan was estimated to cost $22 billion over 10 years, Senate aides said.

The Congressional Budget Office’s cost estimate forced members of the bipartisan group to redraft their plan to tie the rates for Stafford and PLUS loans to changes in the yield on 10-year Treasury notes, said Republican and Democratic aides who spoke on condition of anonymity to discuss the talks.

The delay 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. Lawmakers were unable to agree on a solution to avert the increase before leaving on their week-long break for the July 4 holiday. The interest rate on unsubsidized Stafford loans, which are available to any undergraduate student, was already at 6.8 percent.

Earlier in the day, 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 agreement was dependent on the CBO estimate, which determined how the plan would affect the budget deficit. New variables will be submitted to the CBO for another cost analysis, aides said.

Rate Caps

A big factor in the expense, the aides said, was the cap that negotiators placed on the variable rates. The cap on Stafford loans was set at 8.25 percent; for PLUS loans, which go to graduate students and parents of undergraduates, it was set at 9.25 percent.

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

Senators redoubled their attempt to find a solution after Republicans yesterday blocked a Democratic effort to bring up legislation, S. 1238, that would bring back, for a year, the 3.4 percent rate for 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 student-loan interest rates to the 10-year Treasury note’s yield.

Concession to Democrats

Inclusion of a cap on annual interest-rate increases was a concession to Democrats, who have balked at tying the loans to market fluctuations.

That concept was proposed by President Barack Obama and embodied in House-passed legislation that would peg loan rates to changes in the 10-year Treasury note’s yield. 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 and would cap rates at 8.5 percent.

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

Larger Markup

The markup for PLUS loans would be larger, 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 include 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 yesterday 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 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.

(Updates with Congressional Budget Office analysis starting in first paragraph.)
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