WASHINGTON — A bipartisan compromise on student loans promises better deals for students and parents over the next few years but could spell higher rates as the economy improves.
The Senate deal pegs the interest rates on new loans to the financial markets and was expected to come to a vote next week, well before students returning to campus this fall have to sign their loan agreements.
Under the deal, undergraduates this fall could borrow at a 3.9 percent interest rate. Graduate students would have access to loans at 5.4 percent, and parents would be able to borrow at 6.4 percent. Those rates would climb as the economy improves and it becomes more expensive for the government to borrow money.
The compromise undoes the doubling of rates on some student loans that took hold on July 1, and one analysis of the Senate deal suggests incoming freshmen would save more than $3,300 in interest.
“We have gone through weeks of negotiations and we have an agreement,” said Sen. Dick Durbin, D-Ill.
At the White House, spokesman Jay Carney said President Barack Obama was “glad to see that a compromise seems to be coming together.”
And Sen. Lamar Alexander, R-Tenn., said students benefited: “For every one of them, the interest rates on their loans will be lower.”
At least for now.
The compromise could be a good deal for students through the 2015 academic year, but then interest rates are expected to climb above where they were when students left campus in the spring.
Even in announcing the compromise, it was clear the negotiations were dicey.
“While this is not the agreement any of us would have written, and many of us would like to have seen something quite different, I believe that we have come a very long way on reaching common ground,” Durbin said.
Moments later, Democratic Sen. Tom Harkin of Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, said he would revisit the whole agreement this fall, when his panel takes up a rewrite of the Higher Education Act.
“Can we change it? Sure, we can change it,” Harkin said. “It’s not the Ten Commandments, for God’s sake.”
Harkin did little to hide his unhappiness with the compromise but said there were few options to avoid a costly hike on students returning to campus this fall.
As part of the compromise, Democrats won a protection for students that capped rates at a maximum 8.25 percent for undergraduates. Graduate students would not pay rates higher than 9.5 percent, and parents’ rates would top out at 10.5 percent.
Using Congressional Budget Office estimates, rates would not reach those limits in the next 10 years.
Lawmakers engaged in 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 percent to 6.8 percent.
On Wednesday, the Consumer Financial Protection Bureau estimated outstanding student debt at $1.2 trillion — up 20 percent in just two years. Student loans are now the largest form of consumer debt behind mortgages.