Student loan negotiations hit major roadblock

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An emerging deal to lower interest rates on federal student loans hit a major roadblock Thursday, sources tell CBS News, after lawmakers were told it carried a $22 billion price tag over the next decade.

The proposal was designed to offer Democrats the promise that interest rates would not reach 10 percent and to give Republicans a link between borrowing terms and the financial markets that they sought. However, the high cost of the plan, projected by the nonpartisan Congressional Budget Office, means the plan needs more work before lawmakers can move forward.

Both Democrats and Republicans say they are in favor of lower rates, which doubled last week from 3.4 percent to 6.8 percent after Congress failed to act. Up to this point, however, they have disagreed on whether or not to tie the interest rates to the market. Last week, a measure that would have restored the 3.4 percent rate for another year -- giving lawmakers more time to find a longterm solution -- failed to get the 60 votes necessary to pass.

The latest compromise bears many similarities with a bill that House Republicans have passed, and with President Obama's budget proposal.

"There is no question that there is a compromise available on this important issue and that the sides have not been that far apart and we just need to get it done," White House spokesman Jay Carney said before the Congressional Budget Office released its estimate.

"We have been working with lawmakers to make that compromise happen. We need to make sure that students don't see their rates double," he said.

Under the plan lawmakers were considering, interest rates on new loans would be based on the 10-year Treasury note, plus an additional percentage to pay for administrative costs. The proposal includes a limit on how high rates could climb, a demand Democrats said was a deal-breaker.

That provision proved unexpectedly costly and, for the moment, proved problematic for negotiators.

Undergraduate students would have seen better terms than the current 6.8 percent rate but could have faced higher costs if the economy improves and Treasury notes become more expensive. Rates for students this fall would have been around 4 percent and would have been capped at 8.25 percent in future years.

Graduate students and parents could have found better deals next year but again would have faced higher rates than the current 7.9 percent. Borrowing for those PLUS loans would have been around 6 percent this fall and capped at 9.25 percent in coming years.

Obama's chief of staff, Denis McDonough, and Education Secretary Arne Duncan met with lawmakers Tuesday night to discuss possible options, including the market-based approach Mr. Obama included in his budget outline. Democrats insisted they try one last time to restore the 3.4 percent rate, but after that failed, lawmakers turned to a compromise approach. White House education and budget advisers joined those conversations and helped guide lawmakers to the proposal under consideration.

Democratic Sen. Tom Harkin of Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, joined negotiations on a potential deal he previously called unacceptable. He secured concessions on rate caps from the main authors of an earlier potential compromise, Sens. Joe Manchin, D-W.Va., Richard Burr, R-N.C., and Angus King, I-Maine.

All said they were willing to tinker with some of the details to make it more acceptable to Harkin and his Democratic allies.

Tennessee Sen. Lamar Alexander, the top Republican on the Senate committee, joined in and suggested he could bring with him Republican votes that would help overcome a 60-vote procedural hurdle in the chamber.

But at $22 billion over the next 10 years, it was likely to be far too much red ink to win Republican votes.

If fresh negotiations prove fruitless, millions of students returning to campus next month will find borrowing terms twice as high as when school let out. Without congressional action in the coming weeks, the increase could mean an extra $2,600 for an average student returning to campus this fall, according to Congress' Joint Economic Committee.

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