Student Loan Interest Rate Options Narrow As Deadline Looms

By Jesse O'Connell, NASFAA Policy Analyst 

Barring last minute action, interest rates on subsidized federal student loans are set to increase on July 1. With today marking the last day the Senate is in session prior to the Independence Day recess, the failure thus far to strike a compromise to fix the interest rate increase has many speculating on what possible outcomes remain.

With the Senate keeping a laser focus on immigration reform, it seems unlikely that senators will have enough time to finish their negotiations, vote on a student loan compromise bill, and have it go back through the House for the President to sign by July 1. Several Democrats, including Sen. Tom Harkin (D-IA), chairman of the Senate HELP committee, have indicated that they do not expect a resolution prior to the July 1 deadline. If no compromise is reached, rates will rise from 3.4 percent to 6.8 percent for new borrowers on the subsidized subset of federal student loans.

Unlikely doesn’t mean impossible however, and should last minute consensus be reached it would most likely take the shape of the proposal crafted by a bipartisan group of senators that includes Sens. Joe Manchin (D-WV), Angus King (I-ME), Tom Coburn (R-OK), and Richard Burr (R-NC). The “Bipartisan Student Loan Certainty Act” would require that all newly-issued student loans be set to the U.S. Treasury 10-year borrowing rate plus 1.85 percent for subsidized and unsubsidized undergraduate Stafford loans; plus 3.4 percent for graduate Stafford loans; and plus 4.4 percent for PLUS loans, according to a press release issued yesterday afternoon. The compromise would also reportedly include a variable-fixed interest rate option, similar to the president’s original proposal from last spring. The Congressional Budget Office has determined this legislation would reduce the deficit by $1 billion over ten years.

Conceivably, the Senate could miss the July 1 deadline, but return after the recess and then pass a proposal that would retroactively fix the rate. With additional time to negotiate, the hope is that they can bridge the differences between the Manchin-King proposal, and another proposal offered this week by Harkin. Key differences in this plan include: no differentiation between undergrad and graduate Stafford borrowers, different add-ons (1.5 percent for subsidized Stafford, 3.4 percent for unsubsidized Stafford and 4.5 percent for PLUS), and a cap on the interest rate. Harkin’s proposed cap of 8.25 percent has reportedly been met with resistance from Republican senators. 

If there is no 11th hour compromise and no post-recess agreement, the final outcome could be a simple increase in subsidized Stafford loan interest rates.


Publication Date: 6/27/2013

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