The compromise will fix undergraduate loans to the interest rate on 10-year Treasury bonds plus 2.05 percentage points up to a maximum of 8.25 percent. Graduate loans would add 3.6 percentage points to the 10-year T-bill up to 9.5 percent, and loans for parents would be offered at a spread of 4.6 percentage points to the same benchmark up to 10.5 percent.
While the interest rate on each type of loan would reset each year with the Treasury rate, individual loans would have the same rate for the life of the loan.
The student loan regime would replace a system of fixed rates, with some subsidized loans at 3.4 percent, most other undergraduate loans at 6.8 percent, and several other loans for parents and graduate students ranging upward from 7.9 percent.
Chiefly, the proposal’s sponsors think they’ve made the student loan program more accurately reflect the cost of the loans.
When Congress fixes a rate, “it will always be wrong,” Senator King said on the Senate floor Wednesday, “wrong for the students, as it is now, dramatically – or wrong for the taxpayers.”
In addition, the compromise would cut rates for at least the next handful of years. This year’s rate for most undergraduate students, for example, would fall from 6.8 percent to 3.86 percent.
Lawmakers in favor of the compromise point out that since even students eligible for the cheapest subsidized loans could only cover several thousand dollars of college costs with such measures, their new proposal would save students of all income levels while also cutting rates for the poorest college students. Overall, a typical undergraduate would see $1,500 in lower debt payments over the course of their loan, according to a White House analysis.
But liberal lawmakers said the bill amounted to a bait-and-switch for American students, with low rates on loans now when interest rates are low but with new caps that are above the levels set by Congress at present.