After both houses of Congress failed to reach consensus prior to the summer break, interest rates on new unsubsidized loans doubled from 3.4% up to 6.8%. But pressure from the White House and special interest groups has sent lawmakers back to the drawing board and a bipartisan solution resulted that will make things better in the short run, but potentially much worse in the long run!
The New Interest Rate Plan
The new plan will no longer differentiate between subsidized and unsubsidized loans. There will be one rate for undergraduate borrowers, another for graduate borrowers and yet another for PLUS borrowers. Currently, not only do subsidized loans offer a lower interest rate, but part of the subsidy offered is that the government pays the interest that would otherwise accrue on your debt while you’re in school.
Interest rates will be set at the 10-year Treasury note yield plus 2.05% for undergraduate loans. For graduate studies loans, the rates would be set at the 10-year T-note plus 3.6%. For parent and graduate PLUS loans, 4.59% would be tacked onto the T-note rate.
For 2013 loans taken out for fall semester, new loans for undergraduates will be set at 3.86%, for graduate level students it will be 5.41% and for PLUS loans, the rate will be 6.4%. These are nominally higher than the current rates and only slightly higher than the 3.4% prior unsubsidized rates.
The Pros of the New Rate Plan
For current undergraduates and graduate students, for the next year or so, this rate will be preferable to the current 6.8% rate that resulted from Congress failing to stop the rate hike.
For graduate and parent PLUS loan borrowers, the 6.4% rate under the new plan is better than the 7.9% currently in place.
Compared to the current fixed rates, overall the legislation is promising if (and only if) the 10 year Treasury note yield remains low.
There are caps in the legislation so that the student loan interest rates will not grow beyond a pre-determined level.
The Cons of the New Rate Plan
While the T-note rate is low (currently around 1.81%), student loan interest rates are favorable, but experts have predicted this rate will triple over the next five years as the economy continues to improve.
The notion of a cap is good, but the caps are set too high. Undergraduate loan interest rates could reach as high as 8.25% and for graduate students, up to 9.5%. This is bad news for borrowers and could push the student loan bubble to its limits.
The dissolution of the practice of subsidizing student loans is a big fail for lower income students.
When announcing the bill, “cost savings” were touted that are estimated to contribute $715 million over the next decade to budget deficits. The government already profits significantly from student loans and there are other means of cost savings preferable to making education less affordable.
What’s Next for the Proposed Student Loan Interest Legislation
The Senate bill – S 1334 – is being fast tracked for passage and since it aligns closely to the President’s recommendations, should have no roadblocks to passage and enactment into law. This is a Catch-22 because it offers immediate relief for current students taking loans this Fall, but if Treasury note yields continue to climb, could be a long-term disaster for future students.
And what’s critical to note is that Congress continues to neglect any reform measures for the millions of existing student loan borrowers who are struggling to pay their student loans with no relief available in bankruptcy or other protections offered for every other type of consumer debt.
To keep track of all of your student loans – whether you’re an undergrad, graduate student – or already out in the big bad world dealing with your educational debt, try Tuition.io’s free student loan management tool. You can view your loans, try repayment plans on for size and contact your lenders with questions. Be sure to read our blog for tips on tackling your student loan debt and to stay in the know on important legislation like this!