Alaska News

Student loan solution still stymies Senate

Under pressure to find a quick way to lower rates on federally subsidized student loans, Senate Democrats failed to extend a low rate for another year.

Their plan was blocked by bipartisan supporters of a compromise effort to tie the rate to what the government pays to borrow money. It could get a vote possibly on Thursday and would lower rates on all types of student loans, at least for now.

"I'm optimistic we'll reach an agreement," said Sen. Richard Burr, R-N.C., one of the sponsors of the bipartisan measure, who was involved in the negotiations.

Most Senate Democrats backed a proposal to extend the previous 3.4 percent rate on subsidized loans, about 40 percent of student loans, for another year. They needed 60 votes to limit debate and proceed to a vote on the bill, but that effort failed, 51-49.

Under current law, Congress sets student loan rates. The 3.4 percent for federally subsidized loans expired July 1 and rose to 6.8 percent because lawmakers couldn't agree on a new plan.

With the student loan debate becoming much more complicated, lawmakers were left searching for a plan that could appeal to the different factions. The high costs of college and rising student debt have become a political issue.

Democrats were divided on how to keep rates low. Senate Republican leader Mitch McConnell of Kentucky accused Democrats of blocking a bipartisan plan.

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"Why? Because they've prioritized politics over helping students," McConnell said on the Senate floor. He noted that President Barack Obama had suggested a market-based rate plan that's similar to the one now being discussed in the Senate.

That bipartisan plan would peg rates to the 10-year Treasury note, plus a small charge to cover the government's costs of the loan program. The main sticking point was whether there should be a cap on how high rates on student loans could go in the future. Senators met on Wednesday to try to solve the cap issue.

Under this market-based proposal, rates for both subsidized and unsubsidized loans would drop this year to about 3.7 percent. The rate would be locked in for the life of the loan. Rates for new loans would be set once a year.

A subsidized loan means the government pays the interest while a borrower is in school. Many students who borrow take out both subsidized and unsubsidized federal loans to pay for college because the amounts are limited.

"We're all committed to getting it done so the rates do not increase," said Sen. Joe Manchin, D-W.Va., also a key backer of the market-based proposal, after the vote.

Burr said he was open to the possibility of a cap on loan rates and was optimistic that lawmakers would reach an agreement. He said he and other senators were talking to the Department of Education and the White House.

"I think the White House would like to have this behind them," Burr said.

"We hope we can come to a conclusion later today or tomorrow. That's the talk," said Sen. Angus King, an independent from Maine and another sponsor of the market-based plan.

Senate Majority Leader Harry Reid, D-Nev., supported the one-year extension but said before the vote that senators were meeting to search for a compromise and that progress was being made.

The plan backed by Manchin, Burr and others would peg interest rates to the Treasury's 10-year borrowing rate, plus 1.85 for subsidized and unsubsidized undergraduate loans. That results in 3.66 percent for this year if the plan went through.

Graduate student loan rates would be the 10-year borrowing rate plus 3.4 percent. Another loan, the PLUS loan, would be set at the 10-year rate plus 4.4 percent. The resulting rates for both types of loans for this year would be lower than they are now.

However, rates could be somewhat higher if a cap is added. Supporters of the Senate plan want the student loan program to not cost the Treasury anything or contribute to paying down the deficit.

Supporters also argued that a cap on loan rates wasn't needed. Borrowers could pay monthly on the basis of their income, and there was an 8.25 percent cap on loans that borrowers choose to consolidate in the repayment period.

Most Senate Democrats, however, insisted on a cap on how high loan rates could go.

The Institute for College Access and Success, a nonprofit research and advocacy group, said that neither income-based repayment nor consolidation eliminated the need for a cap on rates.

The institute's president, Lauren Asher, said the Manchin-Burr plan was worse than doing nothing. Rates are expected to go up and could hit 7 percent or more for undergraduates by 2018, and higher for other loans.

"We think there should be a cap on how high interest rates should rise," she said. "There has always been a limit in the history of the program and it's an important protection for students."

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By Renee Schoof

McClatchy Washington Bureau

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