By Peter Schroeder - 07/10/13 11:57 PM EDT
Senators working on a fix for higher interest rates on student loans are headed back to the drawing board after Democrats failed Wednesday to advance their preferred plan to curb the increase.
Senate Democrats were unable to garner enough support for their legislation, which would lower the rates back to 3.4 percent for one year.
Sens. Joe Manchin (D-W.Va.) and Angus King (I-Maine), who caucuses with Democrats, both voted against the measure.
The two lawmakers are part of a bipartisan group pushing a competing measure in the Senate, which would tie the interest rate to 10-year Treasury bonds, allowing it to move with financial markets.
Sen. Tom Carper (D-Del.), the third Democratic sponsor on the competing bill, voted in favor of the one-year extension as well.
The interest rate for new borrowers of subsidized Stafford student loans, which students with a financial need rely on, doubled on July 1 to 6.8 percent, after Congress failed to strike a deal extending the lower rates.
Roughly seven million students are expected to take out those loans in 2013, and they account for roughly a quarter of all college borrowing, according to the Congressional Budget Office.
House Republicans passed a bill that would also tie the borrowing rate to Treasury bonds, and have spent the last several days hammering Senate Democrats to take up a similar approach. The GOP has highlighted the divide between most Democrats and those pushing the competing measure.
The White House also proposed a market-based fix for the student loan rates in its latest budget proposal, but the two parties continue to duke it out over details.
The White House has threatened to veto the House bill, citing several specific concerns about the Republican approach.
For example, the White House objected that the House bill would reset interest rates each year instead of locking them in when a loan is created, and that it lacked key support for borrowers.
The administration threw its support Wednesday behind the Senate Democratic measure that would simply freeze lower rates, making no mention of the compromise bill.
But with that effort scuttled, members return to the negotiating table, searching for a compromise that can reach the president’s desk and earn his signature.
Some Democrats have suggested they could back the compromise bill if stronger caps were put in place to protect students from high rates.
Currently, that measure would only cap interest at 8.25 percent for consolidated loans, and some members have pushed for caps on individual loans as well.
Democrats have also objected to the fact that the compromise bill reduces the deficit, arguing that the government should not make money on the loans, and the bill should trade any deficit reduction for a further lowering of borrowing rates for students.
After the Democratic bill was knocked down, Manchin and King indicated that they were willing to negotiate further, and were hopeful the defeat of a one-year extension could open up talks for a broader compromise.
But King cautioned that efforts to put in a tougher cap might mean higher rates are needed to keep the bill as close to deficit neutral as possible.
“It’s arithmetic,” he said. “If you lower the cap, then the rates are going to have to be higher … how much are you willing to pay in current interest rates, as an insurance policy against potentially higher rates later?”
A reworked version of the compromise bill has been sent to the Congressional Budget Office for scoring, which could take several days, according to one Senate aide.
Senate Majority Leader Harry Reid (D-Nev.) said Tuesday that he was willing to strike a compromise, but would only do so if the bill could guarantee lower rates than the existing 6.8 percent.
With interest rates still lingering near historic lows, Reid argued that any market-based solution means that student loan rates would climb in the future.
“I’ve told my caucus, I’ve told individual senators, if you can explain to me why doing something is better than doing nothing, then we’ll do it,” he said.
“All the proposals, within two years, at the outside three years, make the rate more than 6.8 percent.”
Senate Republicans are broadly supportive of the compromise measure, according to another aide, who cautioned that GOP backing could waver if Democrats insist on another temporary fix, as opposed to a long-term fix like that put forward in the current bipartisan bill.
Ramsey Cox contributed.