CSU Office of Federal Relations

July 1 Deadline Passes as Senate Deadlocks on Student Loan Fix

July 5th, 2013

On July 1, the interest rate for newly issued federally subsidized student loans increased as scheduled from a fixed rate of 3.4 percent to 6.4 percent, the same rate already paid by borrowers in the unsubsidized loan program.  While just about everyone in Washington agrees that this change must be addressed, what a fix should look like, how long it should last and, most importantly, how to pay for it, remain the focus of fierce debate.

Initially, the Obama administration, in its FY 2014 budget, proposed moving most federally financed student loans to a market-based interest rate, as opposed to the fixed interest rate that currently applies to such loans.  Under the administration plan, student loan interest rates would be tied to the rate on 10-year Treasury bond.  Subsidized Stafford loans would have an interest rate equal to the 10-year bond rate plus .93 percent.  For unsubsidized Stafford loans, the rate would be the 10-year bond rate plus 2.93 percent, and for parent and graduate loans (currently fixed at 7.9 percent), the rate would equal the 10-year bond rate plus 3.93 percent.   While the interest rate on loans issued in any given year would change with the Treasury bond, once taken out the interest rate would be fixed for the life of the loan.  This structure ensures that borrowers would always know the interest rate of each individual loan, but also results in borrowers potentially graduating with several different loans with differing interest rates.  A major point of contention with the administration plan is that there is no limit to the maximum interest rate charged to students.

For its part, the House of Representatives passed, largely along party lines, a proposed long-term fix that would also move all federally-backed student loan programs (exept Perkins loans) to a variable “market rate.”  Under the House Republican plan, student loan interest rates would also be set based on the 10-year Treasury bond yield.  Interest rates for subsidized and unsubsidized Stafford loans would be set on a yearly basis at the 10-year bond rate plus 2.5 percent, and would never be allowed to exceed 8.5 percent (often referred to as a “cap” of 8.5 percent).  Loans for parents and graduate students would be set at the 10-year bond rate plus 4.5 percent, and would have an interest rate cap of 10.5 percent.  While the interest rates on the loans would change from year to year, borrowers could still consolidate their loans into a single fixed-rate loan, and would still have all of the repayment options currently available for times of financial hardship such as job loss or pursuing a career in public service.

In the Senate debate continues, with some senators arguing for a move to a market based interest rate, and others preferring to continue the current fixed rate structure until Congress can come to agreement on a long-term fix as part of the reauthorization of the Higher Education Act (HEA).  Senate Democratic leadership clearly prefers a continuation of the current fixed rate scenario for one or two years.  However, the cost of a two-year continuation is just under $9 billion, and while leadership has proposed closing tax loopholes to pay for this, there is tremendous concern that part of the cost would ultimately be offset by cuts to other education programs as has happened in the past.

Currently, the leading Senate alternative to continuing the current rate structure is a plan offered by Senators Manchin (D-WV) and Burr (R-NC) which would mirror the administration plan, but would use slightly different interest rates, setting the rate for the subsidized and unsubsidized Stafford loans at the 10-year bond rate plus 1.85 percent, the rate for graduate loans at the 10-year rate plus 3.4 percent, and the parent rate at the 10 year rate plus 4.4 percent.  Like the administration plan interest rates would not be capped, but loan consolidation and other repayment options would help ensure affordability.

The Senate adjourned for the July 4 holiday without passing any fix to the interest rate increase.   However, as most students will not borrow under the new rates until this fall, it is still possible that a retroactive fix could be agreed to prior to the peak borrowing season.  The Senate is currently scheduled to vote on two different fix proposals on July 10; the Manchin-Burr compromise outlined above, and a one-year extension of the 3.4 percent interest rate.  It is highly unlikely that the Manchin-Burr proposal has the votes to pass.  It is also unclear as to whether the 1-year extension can pass the Senate, let alone pass muster with the House, given its $4 billion cost paid for by closing a tax loop-hole related to 401k plans.

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Last Updated: May 08, 2015