Interest rates on some student loans will double on Monday, as Senate Democrats and Republicans failed to agree on a deal to prevent the automatic hike.
Major immigration legislation took up most of the Senate's bandwidth this week, and a vote on student loans won't come until July 10—well after Monday, when interest rates on new subsidized Stafford student loans rise from 3.4 percent to 6.8 percent.
Last week, some common ground had emerged in the Senate to tie interest rates to the 10-year Treasury note, an approach modeled after a House-passed bill and suggested in President Obama's budget proposal.
But the proposal cosponsored by Sens. Joe Manchin, D-W.Va.; Angus King, I-Maine; Lamar Alexander, R-Tenn.; Richard Burr, R-N.C.; and Tom Coburn, R-Okla., was eventually rejected by Senate Democrats because it didn't cap rates on individual loans and it used the revenues raised for purposes of deficit reduction. The Congressional Budget Office estimated it would cut the deficit by $1 billion over 10 years.
"There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families, instead of closing tax loopholes for the wealthiest Americans and big corporations," said Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid, D-Nev., on Wednesday. "Democrats continue to work in good faith to reach a compromise, but Republicans refuse to give on this critical point."
Reid did back a proposal offered Thursday by Democratic Sens. Jack Reed of Rhode Island and Kay Hagan of North Carolina to lock in current rates for a year and offset the cost by closing a tax loophole on individual retirement accounts. A vote won't come until after the recess, when rates have already doubled—and a vote for the bill will technically be a vote to reduce the rate.
Senate Health, Education, Labor, and Pensions Chairman Tom Harkin, D-Iowa, argued that a one-year extension will give time for lawmakers to reach a long-term solution within the broader context of college affordability while his committee takes up reauthorization of the Higher Education Act this year.
"Congress has had no hearings on the proposals floating around, no hearings--even the Manchin proposal," Harkin said. "We have not fully vetted what these long-term implications are."
Congress can act retroactively on interest rates, meaning little to no effect on students—if the Reed-Hagan proposal is passed and signed by Obama. Earlier this month, a similar proposal to extend rates for two years failed to get the 60 votes needed to overcome a filibuster, and leading Republicans—along with King and Manchin—have said they won't vote for a short-term extension.
"There is no reason to have a short-term political fix on the student-loan issue that only helps 40 percent of the students, when these four senators—in a bipartisan way—have a plan that helps every student with any new student loan after July 1 and lowers interest rates by billions of dollars," Alexander said Thursday of the proposal he and his four cosponsors offered. Their plan would tie rates to the 10-year Treasury note, plus 1.85 percent for subsidized and unsubsidized Stafford student loans.
But Democrats—who simultaneously refer to that proposal as the "Republican" and "Manchin" plan—argue that in the long-term it leaves students worse off than to allow the rates to double, because it lacks a cap on individual loans.
"This is classic bait-and-switch," Harkin said. "One or two years of low interest rates, then they sock it to you."