Negotiators closing in on student loan deal

WASHINGTON -- Congressional bargainers appeared to be closing in on a compromise that would head off a July 1 doubling of interest rates on federal loans to 7.4 million college students and end an election-year battle between President Barack Obama and Congress.

Senate aides from both parties said Friday the two sides were moving toward a deal on how to pay the measure's $6 billion price tag, the chief source of partisan conflict.

The goal is to push legislation through Congress this week so the current 3.4 percent interest rate on subsidized Stafford loans can be preserved for another year. A 2007 law gradually reduced interest rates on the loans but required them to balloon back to 6.8 percent this July 1 in a cost-saving maneuver.

On another front, the two sides were also close to an agreement to overhaul federal transportation programs, according to House and Senate aides from both parties. Negotiations were expected to continue through the weekend, with votes expected this week on either a major transportation bill or an extension of current programs, said the aides, who spoke on condition of anonymity to discuss details of the talks.

Obama said Saturday in his weekly radio and Internet address there was "no excuse for inaction."

"Right now, we are seven days away from thousands of American workers having to walk off the job because Congress hasn't passed a transportation bill. We are eight days away from nearly seven and a half million students seeing their loan rates double because Congress hasn't acted to stop it," Obama said. "This makes no sense."

For weeks, Obama has ridiculed Republicans for not moving quickly to prevent student loan interest rates from doubling, a stance that Democrats have hoped will boost his support among young voters who broadly backed him in the 2008 election. With college costs and student debt growing steadily, the issue ties directly into concerns about the economy and jobs that polls show dominate voters' worries.

Though some rank-and-file GOP lawmakers have opposed letting the government set the rates, Republican presidential challenger Mitt Romney and GOP congressional leaders have backed the one-year extension. The remaining dispute has been over how to pay for it.

Republicans have accused Obama of creating a phony issue and drawing out the battle in an attempt to reap political points. In late May, they proposed several options to pay for the measure, all of which were culled from budget savings Obama himself had proposed in the past, but they said the White House was ignoring them.

"Even though the White House refuses to respond to our bipartisan approach, Senate Democrats are finally working with us, and a solution is within reach -- despite the president's failure to act," said Don Stewart, spokesman for Senate Minority Leader Mitch McConnell, R-Ky.

The talks have involved aides to McConnell and Senate Majority Leader Harry Reid, D-Nev. Democrats said the White House has been kept abreast of the talks, while Republicans said House Speaker John Boehner, R-Ohio, has been kept informed but hasn't participated in the negotiations.

According to Democratic aides, negotiators are approaching a deal to cover the bill's costs by charging companies more to insure pensions and changing rules so companies take fewer tax deductions for their pension contributions. Reid proposed both of those ideas this month.

They said additional money would come from a list of options McConnell has offered, probably one to limit federal subsidies of undergraduates' loans to six years. The government does not begin charging interest on Stafford loans until after students graduate, which can take longer than six years.

"While we're not there, we're well down the road. I think we can get something done," Reid told reporters Thursday. He said McConnell and Boehner "are compromising just as we are and hope we can get something done."

If allowed to double, the higher 6.8 percent rate would apply only to new subsidized Stafford loans for undergraduates approved starting on July 1 and would not affect existing loans.

According to the Education Department, 7.4 million students are expected to get new Stafford loans in the year beginning July 1, with each borrowing an average $4,226. A doubling of interest rates would add about $1,000 to the costs of the average loan, which students typically pay off over 10 or more years.

The Federal Reserve Bank of New York said last month that student loan debt grew this year to $904 billion, even as other types of consumer debt were falling.

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Associated Press writer Joan Lowy contributed to this report.