WASHINGTON - Heading off a costly increase for returning college students, a bipartisan group of senators reached a deal Wednesday that would offer students better rates on their loans this fall but perhaps assign higher rates in coming years.
The deal would offer students lower interest rates through the 2015 academic year, but then rates were expected to climb above where they were when students left campus this spring. The interest rates would be linked to the financial markets, but Democrats won a protection for students that rates would never climb higher than 8.25 percent for undergraduate students. Graduate students would not pay rates higher than 9.5 percent and parents' rates would top out at 10.5 percent.
Under the deal, 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. Those rates would climb as the economy improves and it becomes more expensive for the government to borrow money.
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.
A vote on the agreement could come as early as today, although it could be pushed back to the middle of next week depending on the Senate calendar.
The bipartisan agreement is expected to be the final in a string of efforts that have emerged 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 from both parties called the hike senseless but differed on how to restore the lower rates. Republicans have pushed for a link between interest rates and the financial markets. Obama included that link in his budget proposal, as did House Republicans. Democrats balked, saying it could produce government profits on the backs of borrowers if rates continued to climb.
Leaders from both parties, however, recognized the potential to be blamed for the added costs in the 2014 elections if nothing were done.
The House has already passed student loan legislation that also links interest rates to the 10-year Treasury note.