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Student loan interest rate rises

Posted on 08.21.2013

While college students worked or relaxed during summer vacation, the U.S. House and Senate played politics with student loan rates.  For students who took out loans after July 1 of this year, the rate was set at 3.9 percent for undergraduates, 5.4 percent for graduate students and 6.4 percent for Parent Plus loans.

Undergraduate rates had temporarily doubled on July 1, shooting from the initial 3.4 percent to 6.8 percent because Congress had failed to reach an agreement before the rate sunset.

Congress finally passed the Bipartisan Student Loan Certainty Act of 2013 on Aug. 1, one month after the rate hike. President Barack Obama signed it into law on Aug. 9.

The act puts in place an entirely new way of deciding student loan rates, making the rate dependent on the economy and the 10-year Treasury note rate. The interest rate will be set at the Treasury note rate plus 2.05 percent. The bill also caps the student loan rate at 8.25 percent for undergraduates, 9.5 percent for graduates and 10.5 percent for Parent Plus loans.

“The 10-year Treasury note rate is the rate the federal government pays when it borrows for 10 years, meaning they will pay back what they borrowed at the end of the maturity period,” said Esen Gurtunca, the Donald W. Tanselle Professor of Economics at the University of Indianapolis. “Currently, the 10-year note rate is around 2.58 percent. The government makes a profit from student loans by lending to students at a higher rate than they [the federal government] borrow for 10 years.”

Since the government earns interest on the loans, Gurtunca said that the new legislation is supposed to help reduce the federal budget deficit. The Congressional Budget Office estimates that after an initial increase, the deficit will decrease by about $715 million over the next decade.

Director of Financial Aid Linda Handy said that because the rate is tied to economy, the rate has the potential to change yearly, and students could potentially have a different rate each year.

Handy said that the new interest rate system will be malleable and more closely resemble economic conditions.

“It is more of a flexible rate rather than a flat rate,” Handy said. “It will fluctuate based on what the economy looks like and what it costs for the federal government to borrow money. That way, it will more accurately reflect the economic situation rather than being a set rate.”

Gurtunca said that the recent legislation is a mixed bag, and the Treasury rate formula is vague and has the potential to allow for higher-than-necessary rates.

“It is surely a good thing that they put a limit on the loan rates. However, the formula that will be followed to determine the difference between the 10-year treasuries and student loan rates is not spelled out,” Gurtunca said. “This is a loophole that may lead to higher rates, even with little inflation and a small increase in 10-year Treasury rates.”

Handy said that even though rates likely will be higher than in the past, the Stafford Federal Student Loan is still the best option for most student borrowers.

“For the short term, it is helping the students … It leaves some uncertainty about what will happen each year, but it gives students the satisfaction that it will not go above 8.25 percent,” Handy said. “Even if the rate gets up to 8.25 percent, it will still be the best rate a student can get. So students should apply for Stafford loans before any other loan.”


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