Last year, we saw some major changes in student loan legislation and this year, we may see even more. The Higher Education Act is due to be reauthorized and that could bring changes to both federal loans and interest rates. In addition, lawmakers are pushing a number of student loan reforms to help mitigate the enormous pressure many student loan debtors are dealing with to pay loans they can’t afford. Today, we’ll take a look at a few of the major changes we could see this year for student loans…
#1 Interest Rates on Federal Loans
The 10 year Treasury note yield is now the basis for federal student loans and as of the start of the year, it had peaked at 3% and continues to hover in that range. When the last rate set occurred, the note yield was a much more modest 1.81%, resulting in affordable interest rates on subsidized and unsubsidized Stafford loans of 3.86%, graduate loans at 5.41% and PLUS loans at 6.41%.
At 3%, the legislative add-on of 2.05% translates to a much higher 5.05% for new borrowers, 6.6% for graduates and 7.6% for PLUS loans. And this rate is predicted to continue rising as the recession recedes. Very soon (if not already), loans will be far costlier for new borrowers. The next rate lock-in won’t happen until June, but if the T-note yield continues to rise, it could be bad news.
#2 PLUS Loan Criteria Tightened
For many years, PLUS loan criteria to lend to parents to support their children’s education was relatively lax. But in 2011, the Department of Education amped up the criteria with no prior warning. Any items in collections or charged off would disqualify parents from borrowing. This meant tens of thousands of students could not longer afford school. In particular, HBCUs were hardest hit.
There are questions of whether the DOE had the authority to change the criteria or whether it’s Congressional prerogative. If so, Congress could enact these changes, reject these changes or set whole new criteria. If the criteria continue as current or get more strict, that’s not good for students. Relaxing the criteria will empower more parents, but could put loan repayment at risk.
#3 Student Loan Refinancing Options
Senator Kirsten Gillibrand is pushing S 1066, which would allow student loan holders to refinance their debt. Most of the recent student loan initiatives are aimed at new borrowers, but it’s existing borrowers that tend to be in the direst straits. Her bill, the Federal Student Loan Refinancing Act, would allow student to refinance or consolidate at lower rates – not greater than 4%.
Currently, consolidations average your existing rates and so do not offer any relief on interest, but can serve to pull you out of default or to cut you down to making one large payment rather than several smaller ones. In contrast, Gillibrand’s legislation would offer a real break to those suffering under higher interest rates and larger loan balances.
No matter what 2014 has in store for your student loans, you need to keep a firm grip on them. Use Tuition.io’s free student loan tool to track, manage and optimize your debt. Keep an eye on our blog where we’ll announce any legislative or policy changes that impact student loans. And for help figuring out IBR, PAYE and other student loan matters, consult our Student Loan Help Center.