The Senate was weighing legislation Wednesday that would link interest rates to the financial markets, providing lower rates for all college students this fall but perhaps resulting in higher rates in the years ahead. Senate aides said lawmakers were on track to finish work by late Wednesday afternoon.
Critics, including liberal Democrats and some student advocacy groups, are calling the White House-backed proposal a bait-and-switch measure that would cost future students.
"Rates on every single new college loan will come down this school year, offering relief to nearly 11 million borrowers," Education Secretary Arne Duncan said Tuesday. He appealed to lawmakers to along with a plan that the White House estimates would save the average undergraduate $1,500 in interest charges.
But it would cost future students if the economy improves as expected and interest rates climb.
Rates on subsidized Stafford loans doubled to 6.8 percent July 1 because Congress could not agree on a way to keep them at 3.4 percent.
A bipartisan compromise would overhaul the entire federal loan system before students start signing loan agreements for fall classes.
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 could borrow at 6.4 percent. Those rates would rise as the economy picks up and it becomes more expensive for the government to borrow money.
The compromise could be a good deal for students through the 2015 academic year. After that, interest rates are expected to climb above where they were when students left campus in the spring, if congressional estimates prove correct.
As part of the compromise, Democrats won a protection for students by capping 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.
"That is a guarantee the rates won't go to high heavens," said Sen. Dick Durbin, D-Ill.
Using Congressional Budget Office estimates, rates would not reach those limits in the next 10 years.
But even among those who planned to vote for it, frustrations remained evident.
"The bill that is before us represents a number of compromises that were made on both sides," said Sen. Tom Harkin, the Iowa Democrat who chairs the Senate Health, Education, Labor and Pensions Committee.
Harkin said the legislation is not what he would have written if he had the final say but he also said that he recognizes the need to restore the lower rates on students before they return to campus for classes.
"It's the best that we can do," Harkin said on the Senate floor. "If we don't pass this today, there will be one sure effect: student loans will be almost twice what they would be under this bill."
The compromise negotiated in the Senate closely hews to what House Republicans passed this year, and that's a sticking point for some liberals.
"At a time when Democrats control the White House and the U.S. Senate, we should not support bad legislation almost identical to that passed by a very conservative, Republican-led House," said Sen. Bernie Sanders, a Vermont independent who caucuses with Democrats.
Most Senate Republicans who pushed for interest rates to be linked to the financial markets were likely to vote for the measure. It was negotiated by Democratic Sen. Joe Manchin of West Virginia and GOP Sens. Richard Burr of North Carolina and Lamar Alexander of Tennessee, the top Republican on the Senate Health, Education, Labor and Pensions Committee.
"They may come from different political parties, but they all really care about students. And this bill proves it," said Senate Republican leader Mitch McConnell of Kentucky. "And there's something else this bill proves, too: That Democrats can work with Republicans when they actually want to do it — when they check their partisan, take-it-or-leave-it approaches at the door and actually talk with, rather than at, us."
Democrats, who control the Senate, have been the most vocal critics and have worked to block a compromise.
Sen. Jack Reed, D-R.I., pushed for an extension of the current 3.4 percent rate so lawmakers could address the subject this fall during the revision of the Higher Education Act. Sen. Elizabeth Warren, D-Mass., has objected to students paying higher interest rates than the Federal Reserve offers to big banks.
"I understand that compromise isn't always pretty, but there isn't any compromise in this bill," Warren said last week when the deal was announced.
"In fact, I think the whole system stinks," she added during a Senate speech.
Sens. Patty Murray, D-Wash., and Al Franken, D-Minn., planned to introduce an amendment that would redirect any profits made through the bill to help low-income students.
The Congressional Budget Office estimated the bill as written would reduce the deficit by $715 million over the next decade. During that same time, federal loans would be a $1.4 trillion program.
Durbin, who helped supervise the loan negotiations, said senators' concerns could be part of talks this fall on the Higher Education Act. But for students right now, he said, students needed the compromise to pass to dodge higher costs.
"At the end of the day, we have a very clear choice to make: stick with the 6.8 percent interest rate or lower it," he told colleagues.