WASHINGTON — A bipartisan compromise on student loans — linking interest rates to the financial markets — started to take shape in the Senate Wednesday. If approved, it would prevent rates for new borrowing from doubling in coming days.
Students from lower-income families, who pay substantially lower interest rates than the more affluent, would see interest rates rise slightly to 3.8 percent on new subsidized Stafford loans.
Despite the increase, the rate is still lower than the 6.8 percent students would face if Congress doesn’t reach a deal by July 1 to prevent rates from doubling. The current rate is 3.4 percent.
Rates for new loans would vary from year to year, according to the financial markets. But once a student got a loan, the interest rate would be set for the life of that loan.
A draft of the proposal was obtained Wednesday by the Associated Press.
A day earlier, Democratic Senate Majority Leader Harry Reid said negotiations were afoot and predicted a deal could be reached.
Republicans, meanwhile, have been unrelenting in their criticism of Democrats for opposing tenets of Obama’s student loan proposal, chiefly rates that change every year to reflect the markets. Without action, Republicans said, students would be left not knowing how much they would be paying for classes this fall.
Last year, Congress voted to keep interest rates on subsidized Stafford loans at 3.4 percent for another year. Education advocates worried the interest rate would revert to former rates July 1, leading to extra costs for students.
Six sometimes overlapping versions of student loan bills were being considered. Two bills failed to win votes needed to advance last week, seeming to suggest rates were going to double. The bipartisan Senate plan being circulated with just days to spare before interest rates increased borrows pieces from the various suggestions.
In the potential compromise, interest rates would be linked to 10-year Treasury notes, plus an added percentage. Students with lower incomes would pay less interest than the affluent. When a student signs for a loan each year, the interest rate would be locked in for the life of that year’s loan. For instance, a student could wind up paying more interest for sophomore year than freshman year if 10-year Treasury rates increase.
At the end of their studies, students could consolidate the loans. The current system caps that rate at 8.25 percent, and lawmakers were considering keeping that in place.