[UPDATE (2:15 p.m.)
A group of eight senators introduced the Bipartisan Student Loan Certainty Act this afternoon that retroactively would lower interest rates for students taking out loans after July 1.
Unlike previous proposals, this legislation would cover federal loans for all student borrowers (11 million), not just those that qualify for subsidized loans. It would set rates to that of the 10-year Treasury note, which would be 3.86 percent this year.
The rate would specifically be set each year based on the yield of the 10-year note as determined by the last auction held before June of each year, plus add-ons designed to offset costs that accompany defaults, collections, deferments, forgiveness, and delinquency. The interest rate would be fixed over the life of the loan.
The proposal is supported by Sens. Joe Manchin (D-W.Va.), Richard Burr (R-N.C.), Angus King (I-Maine), Tom Coburn (R-Okla.), Tom Carper (D-Del.), Tom Harkin (D-Iowa.), Lamar Alexander (R-Tenn.), and Dick Durbin (D-Ill.)
Response to the proposed legislation was mixed.
Justin Draeger, president of the National Association of Student Financial Aid Administrators said his organization is pleased to see lawmakers moving toward a sensible, long-term deal.
"A compromise that sets interest rates based on market conditions will ensure that federal student loans stay on par with--or cost less than--private education loans, which contain fewer safeguards for students and parents. Interest-rate caps will also ensure that loans remain affordable in the future," he said in a statement. "We urge lawmakers to pass student-loan legislation, retroactively to July 1, 2013, as soon as possible."
The Senate proposal is more of a "missed opportunity than a cause for celebration" that will cost students more, not less in the long-term, according to Lauren Asher, president of the Institute for College Access & Success, a Washington-based nonprofit.
"Over the next 10 years, it is expected to cost borrowers $715 million more than if current rates were simply left in place, and current rates are already projected to generate $184 billion in profit," Asher said in a statement. "We urge Congress and the administration to enact reforms that make college more affordable, not increase costs for students and families already struggling to pay for higher education."
Asher encouraged lawmakers to use the upcoming reauthorization of the Higher Education Act to improve the information and tools that can help students and families make informed decisions about where to go to college and how to pay for it, simplify the student-aid process, reward colleges that serve low-income students well, and hold colleges accountable for taxpayer funding.]
[UPDATE (5:03 p.m.)
The American Council on Education, which represents presidents of U.S. colleges and universities, has come out in support of the proposed compromise noting that it immediately lowers rates, protects borrowers with interest-rate caps, and provides predictability for students. ACE President Molly Corbett also said in a written statement that tying interest rates to market rates ensures students' borrowing costs reflect broader economic conditions, and she urged lawmakers to pass the agreement.
"Federal student loans have become an essential ingredient in the financing of higher education for millions of students and families," said Corbett. "The terms and conditions of these loans have a direct bearing on the ability of students to start and complete their education and on their financial well-being after they leave school."]
ORIGINAL POST (12:41 p.m.)
U.S. senators from both parties are working together on a new proposal that would link interest rates for all major federal student loans to the market and set a cap on how high those rates can go.
Details on a deal are expected to be released today.
Unlike previous solutions being floated that would cost the government money, this approach reportedly would generate $715 million over 10 years, according to The Washington Post and the Associated Press.
Under the proposal being hammered out now, undergraduates would all pay the same interest rate of 3.85 percent, while graduate students would pay 5.4 percent and parents of students taking out PLUS loans would borrow at 6.4 percent.
The rates would be allowed to increase, but limits would be set. The deal would would cap undergraduate interest rates at 8.25 percent, 9.5 percent for graduate students, and 10.5 percent for PLUS loans.
On July 1, interest rates on federally subsidized student loans went from 3.4 percent to 6.8 percent, as scheduled, when Congress failed to agree on an approach to fend off the automatic increase. The jump was anticipated to cost students a total of $7 billion or about $1,000 per student, per loan. Before the July deadline, several long-term proposals were discussed, but the parties couldn't agree on the details, including setting a cap on rates.
In 2012, when Congress faced the same situation, lawmakers struck a compromise in late June to extend the lower rates for one year.
Student groups are hoping for broader reforms to improve college affordability when Congress is scheduled to consider reauthorization of the Higher Education Act at the end of the year.
Photo: Sen. Richard Burr, R-N.C., from right, Sen. Tom Harkin, D-Iowa, chair of the Senate Education Committee, Sen. Joe Manchin, D-W.V., and Sen. Tom Carper, D-Del., leave a Capitol Hill news conference Thursday after announcing a bipartisan agreement had been reached on rates for government student loans. (J. Scott Applewhite/AP)