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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jun 28, 2012

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On Tuesday the 26th of June, Senate leaders declared they had reached a deal that could prevent interest rates from doubling on student loans. If realized this could save money for over 7 million student loan borrowers.

The agreement plans to freeze interest rates at 3.4 percent for one year, instead of reverting back to the 6.8 percent that would have gone into effect on July 1. This agreement would make student loans more affordable at a time when tuition costs have continued to rise.

Before the agreement is finalized, it must pass a vote in the House of Representatives.

A Stressful Journey

Before this agreement was made, both Republican and Democratic leaders stated they sought a freeze on interest rates for student loans, but they could not agree on a manner to cover the $6 billion cost of the freeze.

Seizing the obvious political opportunity, President Obama toured the nation to rally students—or more accurately young voters—into pressuring Congress to reach a deal. Should the plan come to fruition, President Obama will likely hail it as a personal victory; another gold star on his track record of rallying the nation’s youth to his banner.

Hoping to mitigate the President’s political tactics, Republicans claimed that a deal could have been reached weeks ago had Democrats not turned an issue about student loan debt into a political campaign during an election year. According to Republicans, Democrats stalled efforts to reach a compromise simply to scapegoat Republicans as being inclined to place higher college loan costs on students.

Senate Majority Leader Harry M. Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) jointly announced the plan’s completion on Tuesday. Given the consensus in the Senate and the need to court the nation’s sizable voting-aged youth, McConnell and Reid are confident that the House will also approve the plan.

Showing bi-partisan cooperation McConnell said he and Reid “have an understanding we think will be acceptable to the House.”

“We basically have the student-loan issue worked out,” said Reid, agreeing with his Minority counterpart. “The next question is: What do we put it on to make sure we can complete it?”

The White House chimed in and gave its approval as well.

“We’re pleased that the Senate has reached a deal to keep rates low and continue offering hard-working students a fair shot at an affordable education,” said White House Press Secretary Jay Carney. “Higher education has never been more important to getting a good job. That’s why President Obama has made stopping this rate hike and saving 7.4 million students an average of $1,000 a priority since his State of the Union and has repeatedly called on Congress to act.”

Highlighting just how pivotal young voters are in elections, Republican Presidential candidate Mitt Romney matched President Obama’s vocal support in calling for a Congressional decision to hold interest rates for student loans at their current level rather than doubling.

Despite claims by Democrats that the issue has galvanized the youth vote—and the votes of parents with college-aged children—Republicans state that, for all his youth-oriented campaigning, President Obama had not attempted to reach a deal with GOP leaders.

While McConnell described the President’s level of activity with the deal-making process as “largely uninvolved,” Reid claimed that the White House was instrumental to keeping the issue in the national spotlight.

But returning to bipartisan cooperation, Reid said, “We’re not willing to give up on this issue, and I am glad that my Republican colleagues have agreed we shouldn’t give up on this issue.”

Compromise is the Key

Should the deal fall apart, Republicans believe the Senate will be blamed.

In the past, the GOP controlled House approved a Republican Bill that would keep the interest rate at its current level by terminating a preventive-care fund that was formed by the President’s healthcare law, but the measure was defeated prior to reaching the Senate.

A past Democratic solution that would have funded the student loan ceiling by closing a tax loophole was also defeated.

The current bipartisan Senate plan has proposed to pay for the one-year extension by raising premiums on federal pension insurance. This idea is acceptable to businesses due to the fact that rules regarding the manner in which companies calculate pension liabilities would be altered.

Reid is credited by Democrats as having formulated this solution which would fund $5.5 billion of the freeze’s projected total cost of $6 billion.

Republicans contributed to the deal by stipulating that students must be limited in the length of time they could receive federally subsidized student loans. The Senate decided that the limitation should be 150 percent of an individual’s program’s length.

Since most degrees are four-year degrees, this would mean that the average student would receive federal student loans loan for a maximum of six years.

Reid and McConnell jointly said that while the plan has been arranged, it remains to be seen if it can be pushed through Congress prior to lawmakers leaving for the Fourth of July holiday.

“We’ve very close to having everything done but until we get everything done, nothing’s done,” said Reid, maintaining a cautious tone.