WASHINGTON — The interest rate on a federal loan available to low-income students is scheduled to double on Monday to 6.8 percent because Congress was unable to agree on a long-term fix or temporary extension before adjourning for the holiday recess.
The rate hike on federally subsidized Stafford loans — the largest federal student aid program — has been looming for a year since Congress struck a temporary deal amid the presidential race to keep rates at 3.4 percent until July 1.
The increase will affect more than 7 million students receiving new loans for the upcoming school year.
Without a congressional fix, the average student would end up paying an extra $25 per month, or up to $3,000 more over the life of the loan.
A compromise could be reached before students are affected because most loans will not be disbursed until the fall, buying Congress more time. The Senate is expected to vote on July 10 whether to consider a Democratic bill that would extend the current rate for one more year, with any future agreement to be retroactive to July 1.
But the deepening partisan divisions that have disabled Washington and made even a short-term solution by Monday’s deadline impossible give some higher education leaders little hope.
“Unfortunately the underlying political dynamics coupled with the loss of urgency because we will have passed the deadline suggests we may not see any sort of an agreement,” said Terry Hartle, senior vice president of the American Council on Education. “The irony is nobody wants interest rates to double, but it increasingly appears inevitable.”
The inability of lawmakers to address an issue on which President Obama campaigned heavily has unleashed a new round of finger-pointing by Democrats and Republicans, with both sides urging their constituents to petition their elected officials to settle on a solution.
“It never should have come to this,” said Representative John Tierney, a Salem Democrat who serves on the House Committee on Education and the Workforce. “Ideology drives a lot around here. There’s a whole group of Republicans who feels like not compromising is what they were sent here to do.”
Tierney had proposed a long-term solution that would adjust the interest rate according to the 91-day Treasury bill, with a cap of 6.8 percent, but that bill never came up for a vote.
House Republicans instead passed a bill last month that tied interest rates to how much it cost the government to borrow, with a cap of 8.5 percent. Democrats criticized it for costing students more in the long run.
Obama has threatened to veto the bill, and it stood no chance of passing the Democratic-controlled Senate.
On Friday, Tierney and his Democratic colleagues on the education committee launched a rarely used parliamentary procedure in hopes of expediting action on a new bill that would extend the 3.4 percent rate for one more year.
House Speaker John Boehner, an Ohio Republican, chastised the Democrat-led Senate for leaving town without addressing the issue.
“Millions of American students and their families are about to pay the price for the stubbornness and partisanship of Senate Democratic leaders,” Boehner said. “The inability of the president and leaders of his party in Congress to come together will now mean higher borrowing costs for students already coping with skyrocketing tuition bills.”
This week a bipartisan group of senators offered a new plan that would tie interest rates to the markets but it was squashed by Democratic leadership because it did not have a cap. Earlier this month, a Democratic Senate bill had proposed extending the current rate for two years but it fell short of the 60 votes required to defeat a Republican filibuster.
Senator Elizabeth Warren, a Massachusetts Democrat who also campaigned on lowering student loan debt, had pushed for tying the student interest rate to what big banks pay to the Federal Reserve and lowering loan rates to 0.75 for one year. But Warren’s bill, her first piece of standalone legislation, never made it to the Senate floor.
“We should not be making money off the backs of our students,” said Warren, referring to the $51 billion in revenue the federal government receives from the student loan program by charging more in interest than it costs to borrow the money. Warren and Tierney recently discussed the issue with students at Northeastern University and encouraged them to express their concerns to public officials in Washington.
“It’s perplexing that we’re in this position,” said Jane Brown, Northeastern’s vice president for enrollment management. “Here we are asking students to pay interest rates that are higher than they’re charging banks.”
Interest rates on federally subsidized Stafford loans used to vary from year to year, depending on how much it cost the federal government to borrow the money. But in 2006, in an effort to win the House majority, Democrats campaigned on promising to cut the interest rate from 6.8 percent to 3.4 percent. Upon winning control of the House, Democrats, with Republican support, gradually lowered the rate until it reached 3.4 percent in 2011.
Lacking the political pressure of an impending election and with widespread disagreement over the best way to set interest rates, Congress has been unable to reach a deal. “We’re dealing with government spending in all kinds of vacuums and as a result we have this kick-the-can-down-the-road approach,” said Bob Giannino-Racine, executive director of uAspire, a Boston-based organization focused on making college affordable. “These issues get dealt with in a politically sensitive, hot potato kind of fashion and you have party lines facing off. It was great everyone warded this off a year ago, but we’re right back to where we were.”