AP sources: Senators reach deal on student loans

By PHILIP ELLIOTT
Associated Press

WASHINGTON (AP) -- Heading off a costly increase for returning college students, a bipartisan group of senators reached a deal Wednesday that would offer students better rates on their loans this fall but perhaps assign higher rates in coming years.

The deal would offer students lower interest rates through the 2015 academic year, but then rates were expected to climb above where they were when students left campus this spring. The interest rates would be linked to the financial markets, but Democrats won a protection for students that rates would never climb higher than 8.25 percent for undergraduate students. Graduate students would not pay rates higher than 9.5 percent and parents' rates would top out at 10.5 percent.

Under the deal, all undergraduates this fall would borrow at 3.85 percent interest rates. Graduate students would have access to loans at 5.4 percent and parents would be able to borrow at 6.4 percent. Those rates would climb as the economy improves and it becomes more expensive for the government to borrow money.

The deal was described by Republican and Democratic aides who insisted on anonymity because they were not authorized to discuss the ongoing negotiations.

Undergraduates last year borrowed at 3.4 percent or 6.8 percent, depending on their financial need. Graduate students had access to federal loans at 6.8 percent and parents borrowed at 7.9 percent.

A vote on the agreement could come as early as Thursday, although it could be pushed back to the middle of next week depending on the Senate calendar.

The bipartisan agreement is expected to be the final in a string of efforts that have emerged from near constant work to undo a rate hike that took hold for subsidized Stafford loans on July 1. Rates for new subsidized Stafford loans doubled from 3.4 percent to 6.8 percent, adding roughly $2,600 to students' education costs.

Lawmakers from both parties called the hike senseless but differed on how to restore the lower rates. Republicans have pushed for a link between interest rates and the financial markets. Obama included that link in his budget proposal, as did House Republicans. Democrats balked, saying it could produce government profits on the backs of borrowers if rates continued to climb.

Leaders from both parties, however, recognized the potential to be blamed for the added costs in the 2014 elections if nothing were done.

The House has already passed student loan legislation that also links interest rates to the 10-year Treasury note. The differences between the Senate and House versions are expected to be resolved before students return to campus this fall, and Obama is expected to sign the bill.

Few students had borrowed for fall classes. Students typically do not take out loans until just before they return to campus, and Congress had until they left for the August recess to restore the lower rates. The students who had borrowed for summer programs since July 1 would have their rates retroactively reduced.

Lawmakers and their top aides have been tinkering with various proposals -- nudging here, trimming there -- trying to find a deal that avoids added red ink for students and the government alike.

The deal was estimated to reduce the deficit by $715 million over the next decade.

But if the economy improves as congressional economists predict, rates would climb in coming years. The compromise reached Wednesday evening would limit how high those rates could go, although all were higher than the current fixed levels.

Lawmakers from both parties met with Obama and Vice President Joe Biden on Tuesday at the White House. An outline of an agreement seemed to be taking shape Tuesday, with follow-up meetings Wednesday in Democratic Sen. Dick Durbin's office yielding a final agreement.

Democratic Sen. Joe Manchin of West Virginia and Republican Sen. Richard Burr of North Carolina were the main negotiators, with Republican Sen. Lamar Alexander of Tennessee and Durbin filling the role of mediators.