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Congress Passes New Student Loan Interest Rate Legislation: What's Next For Your Loan

Sep 11, 2013 Jennifer Williamson, Distance Columnist | 0 Comments

Congress has finally approved a bill that connects student loan interest rates to market fluctuations, and now all it needs is the President’s signature. Which is likely to happen, as this is legislation President Obama supports. If the changes become law—and it’s likely they will—the new legislation would impact over 18 million loans totaling billions of dollars, with a huge impact on individual students and their families. With that in mind, here’s what will most likely happen with your student loan.

The good news is that your rate won’t go up much—yet. The new rates will apply retroactively to all loans taken out July 1, 2013 and later—so if yours was one of the subsidized Stafford loans with an interest rate of 6.8% after Congress allowed the rates to double, consider that wiped clean. The new rate will be 3.86%--not as good as the previous rate of 3.4%, but it could be a lot worse. 

The rates for student loans will be locked in once you take out your loan—so your student loan rate will remain fixed. However, the interest rates for new student loans are reset each year against the 10-year treasury note, and any new loans you take out in coming years could have higher interest rates. Those interest rates are capped, though, at 8.5%.

That’s just for Stafford loans for undergraduate students, though. For graduate students who have taken out Stafford loans, the rate cap will be 9.5%. For PLUS loans, the rate will be capped at 10.5%--and that applies to both graduate students and parents of undergraduate students who have taken out PLUS loans on their children’s behalf.

For PLUS loans, the interest rate will rise for the 2013-2014 academic year, going up to 6.41%. PLUS interest rates will also be fixed to the year you take out your loan.

However, because student loan interest rates are now linked to the economy, the rates are expected to go up as the economy improves. Because of this, it will be more expensive for the government to administer loans to students—and more expensive for students to take out loans.

Even so, the loans you take out now will have their interest rates locked in at the rate for that year—so you won’t have to worry about your own interest rates fluctuating with the moods of the market. The increases would only apply to you if you took out additional loans in coming years when the interest rate changes.

Ideally, this new legislation would reduce the deficit by as much as $715 billion. But it’s still important to note that this may not be the last word on student loan interest rates. Even while this law was passed, some lawmakers were discussing new changes to the bill when the Higher Education Act comes up for review in the fall. Students with recent student loan debt may have more changes coming.

There’s no denying that this bill will make new loans more expensive for most students earning a traditional or accredited online degree—raising the rate from 3.4% for undergraduate student loans at the federal level to 3.86%, with an expectation to rise further over the years. In addition, costs for graduate students and parents will go up even more. But this new measure is better than the original change—raising student loan interest rates across the board to 6.8% at minimum. Hopefully, these new measures will work to make college more accessible to all—rather than making student loans prohibitively expensive for new students. 


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