Congressional compromise on student loan rates in the works

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The Senate is expected to vote Wednesday on a bipartisan compromise on student loans that ties interest rates to the market and puts a cap on how high those rates can go.

On July 1, Stafford student loan rates doubled automatically from 3.4 to 6.8 percent when Congress failed to reach a compromise. The plan, called the Bipartisan Student Loan Certainty Act, would see rates drop from their July 1 totals, but students would still be paying more than before.

If the act passes, undergraduate borrowers’ rates will drop to 3.86 percent, and graduate students’ unsubsidized loans will be set at 5.41 percent. Rates on PLUS loans — federal loans for graduate or professional degree students and parents of dependent undergraduates — will drop for the first time since 2006 from 7.9 percent to 6.41 percent.

The plan is expected to generate an additional $715 million for the Department of Education over the next decade. That’s in addition to the $184 billion already expected in profit from new student loans.

The Bipartisan Student Loan Certainty Act links interest rates with the 10-year Treasury note, which is now at 1.81 percent. Undergraduate loans will be set at a fixed rate for the life of loan at 2.05 percent higher than the Treasury note.

In the future, rates will be set on student loans yearly, based on the market, and those rates will last for the life of the loan. To prevent future students from seeing their rates rise too high, Democrats pushed successfully for a cap on interest rates. Undergraduate loans are capped at 8.25 percent, while graduate loans are capped at 9.5 percent and PLUS loans are capped at 10.5 percent.

Rates on all student loans are expected to rise within the next five years if tied to the 10-year Treasury note, the Washington Post reported on Tuesday. According to estimates, by 2018, loan rates will rise to 7.25 percent for undergraduates, 8.8 percent for graduate students and 9.8 percent for PLUS borrowers.

However, Democrats have proposed amendments to lower the cap on interest rates, to implement the act for only two years to allow Congress more time to reform policy on student loans, and to direct the $715 million generated by the act toward the federal Pell Grant Program for low-income students.

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