AP sources: Deal on student loans would set cap

WASHINGTON (AP) -- A day after huddling with President Barack Obama at the White House, a bipartisan group of senators inched closer Wednesday to a compromise that would reduce interest rates on student loans before classes resume.

The emerging deal would offer students lower interest rates through the 2015 academic year but then rates were expected to soar. Undergraduates could face rates as high as 8.25 percent, while graduate students would see rates as high as 9.5 percent and parents' rates would top out at 10.5 percent.

The outlines of the deal were described by Republican and Democratic aides who insisted on anonymity because they were not authorized to discuss the ongoing negotiations by name.

The bipartisan proposal is the latest to emerge from 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, adding roughly $2,600 to students' education costs.

Lawmakers and their top aides have been tinkering with various proposal — nudging here, trimming there — trying to find a deal that avoids added red ink for students and the government alike.

The rate hike did not affect interest rates on existing student loans for undergraduate students, graduate students or parents.

Lawmakers from both parties have tried to restore subsidized Stafford loan interest rates without adding to the deficit. To accomplish that, they have been tinkering with rates on all federal direct lending programs. In most cases, they have linked rates to the financial markets; the result has been lower rates in the short-term but larger bills for future classes.

Undergraduates last year borrowed at 3.4 percent or 6.8 percent, depending on their financial need. Graduate students had access to federal loans at 6.8 percent and parents borrowed at 7.9 percent.

Under the deal being considered, all undergraduates this fall would borrow at 3.85 percent interest rates. Graduate students would have access to loans at 5.4 percent and parents would be able to borrow at 6.4 percent.

But if the economy improves as congressional economists predict, rates would climb in coming years.

The details were still subject to change and aides on Wednesday said previous agreements on student loans have fallen apart after the Congressional Budget Office has returned estimates on how much the system would cost over the next decade.

Lawmakers from both parties met with Obama and Vice President Joe Biden a day earlier at the White House. An outline of an agreement seemed to be taking shape Tuesday, with Democratic Sen. Dick Durbin of Illinois and Republican Sen. Lamar Alexander of Tennessee guiding the talks.

Sen. Tom Harkin, the Iowa Democrat who chairs the Senate's education panel, said the caps on interest rates were still too high. That seemed to again derail the talks.

Sen. Joe Manchin, D-W.Va., Sen. Richard Burr, R-N.C., Sen. Tom Coburn, R-Okla., and Sen. Angus King, I-Maine, were also part of the negotiations on Thursday.

Senators returned to talks on Thursday in Durbin's office although Harkin continued to object to the high rate on caps.

The House has already passed student loan legislation that also links interest rates to the 10-year Treasury note. If the Senate can reach a deal, the differences between its version and the House version could be resolved before students return to campus this fall.

So far, few students have borrowed for fall classes. Students typically do not take out loans until just before they return to campus and Congress still has time to restore the lower rates.

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