Senate Reaches Tentative Deal On Student Loan Interest Rates

One day after failing to move forward on a one-year extension of low interest rates on federal Stafford student loans, the U.S. Senate has reportedly reached a tentative agreement that tie interest rates to the 10-year Treasury bond, thus resulting in a moderate increase in interest rates for students taking out their first loan this fall.

On July 1, interest rates for subsidized Stafford loans reverted from 3.4% to 6.8%. Given the desire to appease young voters (and their parents) and to not add considerably to the existing $1 trillion mountain of student loan debt in the U.S., lawmakers have been feeling the pressure to figure out a sensible long-term solution.

Like the bill passed earlier this summer by the House of Representatives, the Senate compromise would tie the interest rate paid on new student loans to the yield on the 10-year Treasury note, but at a slightly lower level. The House bill added 2.5% on top of the bond rate, but the NY Times reports that the Senate has reduced that that to 1.8%. So students taking out their first loan in August or September will see rates of around 3.6%.

Graduate student Stafford loans tack on 3.4% above the bond rate, while federal PLUS loans would be 4.5% over the yield rate.

New rates will be issued each year, but will be fixed for the life of the loan. So a college freshman taking out her first loan at 3.6% this fall will continue to see that interest rate, regardless of future changes. The House bill had allowed for interest rates to fluctuate, but that idea was seen as too unpredictable.

Because bond rates can spike unexpectedly, the compromise also puts a cap of 8.25% on interest rates for undergraduates, and 9.25% on graduate student loans.

This afternoon, Sen. Lamar Alexander of Tennessee told Bloomberg that an agreement had been reached “in principle” and that lawmakers were waiting on a final report from the Congressional Budget Office before moving forward.

If signed into law, the interest rate would be set each year by the yield on the most recent 10-year Treasury note auction before June 1 of that year. In this year’s instance, that auction was for notes issued May 15 with a yield of 1.81%.

Senate Reaches Tentative Agreement on Student Loan Rates [Bloomberg]

Tentative student loan rate deal reached in Senate, aides say [Washington Post]

Tentative Senate Deal Reached on Student Loan Rates [NY Times]