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 told reporters.
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.
A Harkin ally, Sen. Jack Reed of Rhode Island, said he would vote against the bill.
"We might see one or two or three years of rates that are relatively below that number, but inevitably, mathematically those rates will go beyond 6.8 percent," Reed said on the Senate floor after the deal was announced.
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.
And one analysis from a former director of that office predicted students starting college this fall would face $3,325 less in interest payments when they graduate. Doug Holtz-Eakin, who leads the conservative American Action Forum, used the average subsidized and unsubsidized loans students were estimated to borrow during each the next four years of college.
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.
The Congressional Budget Office estimates 21 million loans would be issued in 2013. Students often take a combination of subsidized and unsubsidized loans to pay for their education.
The rapid growth in debt is raising alarm among experts, and there is growing evidence student debt is weighing down the economy – for instance, by delaying the ability of young graduates to buy homes.
The increase follows the jump in the cost of higher education.
The tuition sticker price at public four-year colleges is up 27 percent beyond overall inflation over the last five years, according to the latest figures from the College Board. This past year it rose nearly 5 percent to an annual average of $8,655 nationwide.
Only about one-third of full-time students pay that published price, and the average net price – what the average student does pay after grants, scholarships, loans and federal tax credits and deductions – is just $2,910 for a year of studies. But net prices have been rising, too, and tuition is just part of the cost of college. Including room and board, the average annual sticker price at public colleges is now $17,860, and students pay on average $12,110.
At private four-year colleges, the annual average full tuition price is now just under $40,000, with the average student paying $23,840.
The bipartisan student loan compromise closely hews to what House Republicans passed earlier this year. Both Senate Republican Leader Mitch McConnell and Republican House Speaker John Boehner suggested the outlines of the proposal were acceptable to the GOP rank-and-file members who have pushed for a link between interest rates and the financial markets.
Even House Democrats who opposed the GOP-led deal there appeared ready to go along.
"I'm encouraged that bipartisan efforts continue in the Senate to reverse the student loan interest rate hike," said Rep. George Miller, the top Democrat on the House Committee on Education and the Workforce.
Few students had borrowed for fall classes. Students typically do not sign loans until just before they return to campus, and lawmakers have until the August recess to restore the lower rates. The students who had borrowed for summer programs since July 1 would have their rates retroactively reduced.
The deal was estimated to reduce the deficit by $715 million over the next decade.
Associated Press Higher Education Writer Justin Pope in Ann Arbor, Mich., contributed to this report.
Follow Philip Elliott on Twitter: http://www.twitter.com/philip_elliott