Federal Student Loans Affordable Again (For Now)

To all the incoming college freshman and other first-time student loan borrowers, you need no longer worry about paying 6.8% interest rate on the federal Stafford loan disbursement you’re about to receive, as today the President signed much-debated, long-delayed legislation that will only result in a slight uptick in interest rates for the coming school year, but could also go much higher in years to come.

Back on July 1, the interest rates on subsidized undergraduate Stafford loans — which previous legislation had temporarily reduced from 6.8% to 3.4% for several years — bounced back to the higher rate when the Senate failed to come to agreement on a plan. However, the bill signed this afternoon by President Obama is retroactive to July 1, meaning any loan with a first disbursal since that date will be charged the lower interest rate of 3.86%.

So how did they reach this specific number? The final version of the Bipartisan Student Loan Certainty Act of 2013 ties interest rates on Stafford and PLUS loans to the high yield of the 10-year Treasury note. Each year, the Dept. of Education will take whatever the yield was at the last auction before June 1 of that year and then add on a specified number of percentage points.

For undergraduate Stafford loans, the DOE will add 2.05 points to the yield rate; thus the 3.86% for this coming year. The initial version of the bill that passed through the House had added 2.5 points to the yield, while an early Senate compromise tried to lower that number to 1.8. The final bill almost splits the difference.

Graduate Stafford loans get 3.6 percentage points on top of the yield rate, so for the upcoming year, the interest rate is 5.41%.

Rates for Federal PLUS loans are calculated by adding 4.6 points to the yield rate, meaning new borrowers will pay 6.41% interest.

Those opposed to the idea of tying student loan rates to the Treasury note said it would introduce unpredictability and volatility into a loan market that should be steady and secure. So in case the market goes nuts and yield rates skyrocket, the law also caps each of the rates — 8.25% for undergrad Stafford, 9.5% for graduate Stafford, and 10.5% for PLUS loans.

Another issue that was central to the debate over student loans was whether these variable interest rates would be good for the life of the loan — as they had been previously — or would change each year. Ultimately, it was agreed that fixing the rates for the life of each loan was the best option. So borrowers taking out loans at the above rates will see those same rates for the years they remain in school.

Now let’s see what we can do about paying down that $1 trillion-plus in student loans that are currently outstanding — and which is only being paid back by about half the people that owe money.