Student loan interest deal appears to be falling apart in Senate

Efforts to keep interest rates on new student loans from doubling appeared to be falling apart Wednesday as the Democratic leader of the Senate declared a bipartisan proposal unacceptable.

With just days to spare before a July 1 deadline, a group of senators from both parties attempted to link interest rates on new federally subsidized Stafford loans to the financial markets in a deal that would avert a costly rate hike for now but could spell higher rates in coming years. The loans account for a quarter of all federal student lending.

The proposal seemed to stall even before it had a chance to be considered.

The chamber's top Democrat, Sen. Harry Reid of Nevada, said it could never pass. The Democratic chairman of the education panel said he couldn't back a plan that doesn't include stronger protections for students and parents.

Undeterred, Sen. Joe Manchin, D-W.Va., said Wednesday he would introduce the legislation on Thursday, along with Republican collaborators Sen. Tom Coburn of Oklahoma, Sen. Lamar Alexander of Tennessee and Sen. Richard Burr of North Carolina.

Aides to Manchin said he expected to have Democrats on board, as well.

Republicans have long sought to link student loans to the financial markets instead of letting Congress set the rates for federal lending. President Barack Obama included a variation of that market-based approach in the budget he sent to Congress earlier this year, leaving his fellow Democrats grousing and trying to thwart those efforts.

"Why Senate Democrats continue to attack the president's plan is a mystery to me, but I hope he's able to persuade them to join our bipartisan effort to assist students," said Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell.

McConnell was keeping tabs on the Manchin-led talks and GOP aides suggested the resulting proposal might be the best -- if not only -- way to the Senate to advance legislation that would prevent a rate hike that Congress' Joint Economic Committee estimated would cost the average student borrower an extra $2,600.

The proposed deal was described by Democratic and Republican Senate aides familiar with the negotiations. They insisted on anonymity to discuss the compromise because an was planned for Thursday.

Under the Manchin-led deal, interest rates would be based on the 10-year Treasury note plus an added percentage rate.

For loans taken this fall, that means all undergraduate borrowers would pay 3.6 percent interest rates, graduate students would pay 5.2 percent and parents would pay 6.2 percent. In future years, those rates could climb and there was not a cap on how high they could go.

Some undergraduates currently pay 3.4 percent or some pay 6.8 percent, depending on their loan structures and many students borrow at both rates. Graduate students and parents borrow from the government at 7.9 percent interest under the current system.

But if the Congressional Budget Office estimates for 10-year Treasury notes hold, students might be better off if rates double as scheduled to do. The low-at-first undergraduate subsidized Stafford loan rate would rise to the current 6.8 percent for the 2017 year and reach 7.2 percent the next year under the compromise proposal.

There is no limit to how high interest rates could go.

That, Democrats and student groups have warned, will hurt students worse than no deal at all.

"Any proposal that lacks a cap is a nonstarter and indicates that its proponents are putting their ideology above students and their families," said Allison Preiss, a spokeswoman for the Democratic-led Senate Health, Education, Labor and Pensions Committee that Sen. Tom Harkin leads.

And a group of coalition of student groups wrote Senate leaders earlier this week: "No deal is better than a permanent bad deal."

For now, there seemed to be no vote imminent.

"There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families, instead of closing tax loopholes for the wealthiest Americans and big corporations," said Reid spokesman Adam Jentleson. "Democrats continue to work in good faith to reach a compromise but Republicans refuse to give on this critical point."

The bipartisan proposal would save the government $960 million over a decade. Republicans have said they want any savings to go toward paying down the national deficit while Democrats insist any money generated from the program should go back to students and not to reduce red ink.

Students loans issued this year were set to bring in $51 billion net gain over the next decade.

The compromise plan would keep the cap on a students' annual loan repayment at no more than 15 percent of a graduate's income. When students start paying back their loans, they could consolidate them at a rate no higher than 8.25 percent.

The Republican-led House earlier passed legislation for student loans but let the interest rates shift every year, meaning loans taken at one interest rate to pay for freshman year could have higher rates by graduation day.

The White House threatened to veto that bill, although top officials later told lawmakers they were open to a compromise that could win congressional approval and avoid an embarrassing and avoidable rate hike.

Democrats in the Senate earlier tried to push through a measure that would extend current rates for two years while lawmakers rewrote the law that governs all higher education institutions that receive federal dollars. That process was slated to being this fall -- too late to help students returning to campus this fall.

Those efforts to keep rates at 3.4 percent fell apart under Senate rules. Senate Republicans, too, failed to advance their own student loan bill.

Some leaders in the Republican-led House said they were likely to pass whatever the Senate sends them. While the House already passed its own version of student loan legislation, the principles included in the Senate compromise were acceptable and GOP officials were not eager to revisit the issue.

If lawmakers don't formally act before the July 1 deadline, officials say they can pass the bill when they return from the July 4 holiday and retroactively set the rates. Officials say few students are expected to sign loan documents in July and instead were looking to finalize the aid packages closer to returning to campus in the fall.

Additionally, Obama left earlier Wednesday for a trip to Africa. He is not set to return until after the July 1 deadline and the White House is likely to want a public signing ceremony.