NEW YORK (MainStreet) As the eleventh hour for a student loan deal gets longer, Senators Jack Reed (D-Rhode Island) and Elizabeth Warren (D-Mass.) are proposing a new wrinkle which would move a student loan deal closer to the one that expired on July 1, when Stafford loan rates were 3.4%.
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Reed and Warren are not O.K. with interest rates that track the market and could rise above their current levels. But their proposal, an amendment to senate bill S. 1334, currently under consideration, only amounts to half a loaf. The cap wouldn't be engaged until rates hit 6.8%, for graduate and undergraduate loans, the new rate that went into effect on July 1exactly double the old rate of 3.4%. For PLUS loans, the cap will be 7.9%.
It is a far cry from the bill first bill Warren proposed in the senate, which would have aligned student loan rates with the Fed funds rate--what banks charge each other for overnight loans--which is currently less than 1%.
While this is clearly a concession to a rising rate environment, it is still a better than what's currently under consideration, where undergraduate rates won't stop until they reach 8.25%. Loans for graduate students would be limited to 9.5%, and PLUS loans co-signed by parents would peak at 10.5%.
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At the end of the day, students would not have to worry about rates going to 9 or 10% if the Reed-Warren amendment passes---even though 3.4% would be ancient history. A senate source stated that the situation would be worse if the current bill passes than if there was no bill at all.
The source also said that the expectation is that the billS 1334--will be voted on tomorrow, with or without the Reed-Warren amendment.
The Department of Education stands to make a profit on these loans. A spokesperson from the department could not be reached for comment. Senators Patty Murray, (D-Wash.) and Al Franken (D-Minn.) are said to have plans to introduce an amendment that would channel any profits made from rate hikes in a new bill to help defray the costs to low-income students. A spokesperson for Murray or Franken could not be reached.
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According to Congressional Budget Office estimates, loans would begin to spike under the current bill before the senate, with Stafford loans breaking the 6.8% barrier by 2017, grad student loans in 2015 and PLUS loans by 2014. Rates start with the 10-year Treasury, but are determined by an add-on rate. The 2013 Undergrad Stafford rate, for example, would start with the 10-year Treasury--1.81--plus an add on of 2.05, putting the rate at 3.86%.
--Written by John Sandman for MainStreet