A new compromise on student loan rates is a reasonable approach that will enable college students to avoid paying significantly higher interest rates this fall and provide them with some certainty in the future. The deal eventually will cost students more to borrow money to go to college, but it includes important protections and should be approved by Congress.
As usual, it took a missed deadline to get lawmakers to compromise. The old fixed rate of 3.4 percent on subsidized Stafford student loans expired July 1 and doubled to 6.8 percent because Congress could not agree on keeping the same rate for another year or on a new formula. That was unfair to students who already are struggling with fast-rising tuition costs and a debt load many families find difficult to handle.
The deal announced by Senate Republicans and Democrats this week would tie student loan rates to 10-year Treasury note rates, just like a version the House approved in May. That means rates would be 3.86 percent for new loans this fall for undergraduate students, although those rates for new loans will be expected to rise in future years. But there are two important protections that were not part of earlier proposals.
First, the Senate agreement keeps interest rates fixed over the life of each student's loan. That's important, because a fixed rate gives the student certainty about the borrowing costs when they decide to take the loan. The earlier House version would have allowed rates on even existing loans to reset every year, which could have meant far higher interest rates for students years after they took out the loan.
Second, the Senate deal caps interest rates on future loans. The rates could rise no higher than 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for loans to parents. That would offer some protection to students in future years as the economy recovers and rates on Treasury notes rise.
The agreement is not perfect, and it still would generate $715 million for the government over 10 years on the backs of college students struggling to make ends meet. But that is less than earlier versions, and the compromise beats the status quo and what House Republicans had been proposing. The Senate is poised to approve the deal next week, and the House should embrace it within days so President Barack Obama can sign it into law and students can have a clear view of the cost of borrowing money for college.