Federal Student Loan Changes

The fate of interest rates for federal student loans has been in limbo for nearly a month. Finally, Congress has come up with a fix that will save students money in the short term but could end up costing them more in the future.

For months now, we were worried that interest rates on federal student loans would double -reaching 6.8% – if Congress couldn’t reach a compromise before their July 1 deadline. The date came and that’s exactly what happened. But, just in time for the fall school year, our legislative leaders seem to have reached an agreement.

Under a plan passed Wednesday by the Senate, interest rates will no longer be voted on and reauthorized periodically by Congress but set  to a 10-year Treasury auction rate. This way of setting the rate treats students like other borrowers, making them subject to market rates at the time they borrow. Again, the changes have been approved by the Senate but are pending approval by the House, which experts say is likely.

“Unfortunately, the solution is worse than the problem,” says student loan expert Heather Jarvis. “It’s a double-edged sword. During times when the market is weak, students will win. But pretty much everyone agrees that rates are subject to rise.”

Today’s Treasury rates are unusually low, so the rate is proposed to be set in the fall at 3.86% for undergrads, 5.41% for graduate students and 6.41% for parents. That’s significantly better than where they were before Congress acted but, as the economy gets better, the cost of financing an education will rise. The Senate plan, however, does place a cap of 8.25% on interest rates for undergraduate loans, 9.5% on graduate loans and 10.5% for parent Plus loans— higher than what students and parents have payed in the past.

It’s important to note that any existing loans with the federal government wont’ be effected by these changes. For all future loans, the plan will be  retroactive to July 1, 2013. That means, in large part, students entering school and borrowing in the fall will be get their loans at the new rate. Jarvis explains that once the loan is issued, it will be fixed and won’t change over time. But every year, new loans will be issued and their interest rates will be evaluated and set, according to market conditions, every June 1st.

“People entering now are borrowing at the right time. Rates are low,” Jarvis says. “But someone starting high school is likely to borrow at significantly higher price. An increased rate could mean a difference of a few different thousand dollars more. That’s real money people could use.”

Photo Courtesy, 401(K) 2012.

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