Certainty in Federal Student Loan Rates

Congress recently passed legislation that will lower federal student loan rates. This legislation provides a level of certainty for all taxpayers. While more details will be forthcoming, here is what is known.

In a recent announcement, Congress has passed a bill that will take much of the politics out of establishing student loan rates….at least for now.

Background

With over $1 trillion in student loan debt, the cost of student borrowing is quickly becoming a major economic issue in the United States. The rates for many popular government sponsored loan programs doubled on July 1st from 3.4% to 6.8%. Since some 18 million loans could be affected, Congress determined it was necessary to address the scheduled change.

New Rate Program

Under the recently passed legislation, the rates for these loans will now be set against a market rate formula with a cap on the highest possible rate. The hope is that by making the rate a formula, it removes politics from the process and allows families and students to better plan their costs. Specifically,

  • Interest rates will be set annually with the rate linked to the 10-year Treasury note rate.
  • The current rates are as follows:

Fall 2013 rates

Rate Cap

Undergraduate

3.9%

8.25%

Graduate

5.4%

9.5%

Parents

6.4%

10.5%

With the passage of this law, approximately 11 million loans will see an average interest savings of $1,500 per the White House.

Challenges

While the passing legislation provides some certainty in student loan rates, there are already rumblings that future legislation is forthcoming. Why?

  • The rates noted are well above the interest rates the federal government is providing banks. There are many in the legislature that believe students should receive a similar benefit.
  • Many believe the rate should be more closely tied to the cost of funds, not a market pegged rate.
  • With the projected federal student loan debt at $1.4 trillion in the next decade, the interest cost paid by students could impact the economy as these interest payments could delay purchasing first homes, cars and other items.

 

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