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 Lawmakers from both parties had agreed on a tentative proposal that offered Democrats the promise that interest rates would not reach 10 percent and gave Republicans a link between borrowing terms and the financial markets that they sought. But that deal's red ink proved disqualifying and sent them back to square one.
Senators and their top aides, along with White House and Education Department officials, were going to return to negotiations for a deal that would undo the rate increase on subsidized Stafford loans, which doubled from 3.4 percent to 6.8 percent on July 1.
Without congressional action before students return to campus, the increase could mean an extra $2,600 for an average student, according to Congress' Joint Economic Committee.
"We have been working with lawmakers to make that compromise happen. We need to make sure that students don't see their rates double," White House spokesman Jay Carney said Thursday.
The $22 billion cost for the 10-year rate compromise, however, stopped progress in its tracks and sent lawmakers back to the drawing board. The unexpected cost estimate was unlikely to end talks among lawmakers about how they might reduce rates on subsidized Stafford loans but added difficulty to an already tricky timeline.
The cost estimate was described by a congressional aide involved in the negotiations. The aide was not authorized to discuss the proposal by name and insisted on anonymity because the Congressional Budget Office report had not yet been widely released.
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 provision that Democrats insisted be included in any legislation.
That proved unexpectedly costly and, for the moment, proved problematic for negotiators.
Serious work on a compromise came just hours after Democratic-led efforts to restore the 3.4 percent interest rates failed once more to overcome a procedural hurdle in the Senate. After several failures to find a stopgap measure, Democrats abandoned that tactic and instead looked for a way to lower rates for students before their return to campus this fall.
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 President Barack 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 Obama included in his budget outline. Democrats insisted they try one last time to restore the 3.4 percent rate.
After that failed, lawmakers turned to a compromise approach and met Wednesday in the office of Sen. Dick Durbin, D-Ill., to discuss the next steps. 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.
But the tinkering -- particularly the cap on rates while students are in college -- proved costlier than anticipated. Lawmakers from both parties agreed that any compromise could not be laden with red ink.
[Associated
Press; By PHILIP ELLIOTT]
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