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July 11, 2013

Compromise closer in Congress on student loan interest rate plan

    Senators have reached a tentative agreement on a plan that will tie student loan interest rates to the market.

    If it goes through, the plan would make rates on all types of student loans cheaper for the next school year. But in the future, student loans along with all other kinds of loans would cost more if rates go up, as they're expected to do.

    In a meeting Wednesday night, Republican and Democratic senators agreed on a rate of the 10-year Treasury note rate plus 1.8 percent, which would make rates for all undergraduates 3.6 percent this year, a Senate aide said, speaking on condition of anonymity because the deal isn't final. The rates would be locked in for the life of the loan. Rates on new loans would be set once a year. And there would be a cap of 8.25 percent on undergraduate loans.

  The cap was a major sticking point until the agreement yesterday. An earlier market-based rate plan offered by a bipartisan group of senators didn't have one. A cap removes risk and therefore has cost.

    Later on Thursday the nonpartisan Congressional Budget Office reported that the loan program set up this way would cost $22 billion over 10 years because of the cap. Now a group of senators will have to negotiate some more over how to set the rates so that the student loan program is revenue neutral.

    Most Senate Democrats wanted another extension of the 3.4 percent rate on subsidized loans instead of the market-based rate plan. There was a vote yesterday to prevent a filibuster on the rate extension, but it failed to get the 60 votes needed. (Story here.)

    Congress wants to settle the rates issue soon because students take out loans shortly before classes start in August and September. And Congress starts a five-week recess Aug. 5.

     Interest rates became a political issue because students are borrowing so much to pay for the rising cost of college. Last year Congress granted a one-year extension of the 3.4 percent rate on subsidized student loans, which are about 40 percent of all loans. The extension was supposed to give Congress time to come up with a new plan on student loan interest rates. But a July 1 deadline passed, no solution was reached, and the rate on subsidized loans went up to 6.8 percent, the same rate as for unsubsidized undergraduate and graduate loans.

    The market-based plan reached late Wednesday, before the CBO cost estimate came out, would put graduate student rates at the 10-year Treasury rate plus 3.4 percent, or 5.21 percent this year. PLUS loans, which are education loans that have no set limits, would be the 10-year government rate plus 4.5 percent, or 6.31 percent this year. Graduate and PLUS loans in the future could not go above 9.25 percent.





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I don't understand why government is in the loan business in the first place. That's what banks and loan companies are supposed to be for.

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"Planet Washington" covers politics and government. It is written by journalists in McClatchy's Washington Bureau.

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