Senators reach deal on student loan interest rates

Susan Davis | USA TODAY

WASHINGTON -- A bipartisan group of senators reached a deal Wednesday evening to offer college students better rates on loans this fall but higher rates in future years.

The agreement comes one day after lawmakers met with President Obama at the White House.

The Senate deal would offer students lower interest rates through the 2015 academic year, but then rates would likely climb higher than they were when students left campus this spring.

The interest rates would be linked to the financial markets, but Democrats won a protection for students that rates would never climb higher than 8.25% for undergraduate students. Graduate students would not pay rates higher than 9.5%, and parents' rates would top out at 10.5%.

The deal was confirmed to USA TODAY by a Democratic aide who was not authorized to discuss the ongoing negotiations publicly and insisted on anonymity.

A vote on the agreement could come as early as today, although it could be pushed back to the middle of next week.

The bipartisan agreement is likely to be the final in a string of efforts that have emerged from near constant work to undo a rate hike that took hold for subsidized Stafford loans on July 1. Rates for new subsidized Stafford loans doubled from 3.4% to 6.8%, adding roughly $2,600 to students' education costs.

Lawmakers from both parties called the hike senseless but differed on how to restore the lower rates.

Sen. Lamar Alexander, R-Tenn., the top Republican on education issues, told Politico the proposal would apply to students who have already taken federal loans at higher rates.

"It would save students in 11 million families billions of dollars," he said. "We'd like to be able to do this together, and we hope that we can come to a decision right away because families need to make their plans."

The House of Representatives has passed student loan legislation that also would link interest rates to the 10-year Treasury note. The differences between the Senate and House versions are expected to be resolved before students return to campus this fall.

Students typically do not take out loans until just before they return to campus, and Congress had until they left for the August recess to restore the lower rates.

The deal was estimated to reduce the deficit by $715 million over the next decade.

Undergraduates last year borrowed at 3.4% or 6.8%, depending on their financial need. Graduate students had access to federal loans at 6.8% and parents borrowed at 7.9%.

Under the deal, all undergraduates this fall would borrow at 3.85% interest rates. Graduate students would have access to loans at 5.4%, and parents would be able to borrow at 6.4%.

If the economy improves as congressional economists predict, rates would climb in coming years.

The compromise reached Wednesday would limit how high those rates could go, although all were higher than current fixed levels.

Contributing: Michael Winter and the Associated Press