“Student Loan Rates to Increase”
That’s the way most reports talk about the latest big issue in Washington, D.C.: “Student Loan Rates to Increase.”
But it’s a smaller story than those headlines imply. Most student loans will stay at the same rate. An increase for new subsidized Stafford loans kicked in on July 1st.
Under current law, all subsidized and unsubsidized loans originated on or after July 1, 2013 have a fixed interest rate of 6.8 percent rather than former rate of 3.4% for the subsidized loans, and all GradPLUS and parent loans will have a fixed rate of 7.9 percent. The interest rate on all consolidation loans is capped at 8.25 percent.
So the kids in college today stand to pay more on their student loans if they take new loans out—unless Congress comes to the rescue. And come to the rescue Congress plans to do.
In May, the House passed a bill called H.R. 1911, the Smarter Solutions for Students Act. (It’s up to you to decide whether it’s “smarter” or not, of course…)
The bill would change the interest rates for all new federal loans to students and parents made on or after July 1, 2013, from the fixed rates currently set in statute to a variable interest rate, adjusted annually. Interest rates for all new subsidized and unsubsidized student loans would be based on the interest rate on a 10-year Treasury note plus 2.5 percentage points, with a cap of 8.5 percent. (Borrowers pay no interest on subsidized loans while enrolled in school or during other deferment periods but are responsible for interest at all times on unsubsidized loans.) The interest rate for all new GradPLUS and parent loans would be based on the interest rate on a 10-year Treasury note plus 4.5 percentage points, with a cap of 10.5 percent. The bill also would eliminate the cap on the interest rate on all new consolidation loans originated on or after July 1, 2013.
That’s the House. Things are different in the Senate.
Most Senate Democrats support a bill from Senator Jack Reed (D-RI) that would extend the 3.4% rate on subsidized Stafford Loans for another year. (The higher spending is counterbalanced by ending a tax break on tax-deferred retirement accounts.) The bill is called the Keep Student Loans Affordable Act, or S. 1238.
But another prominent bill in the Senate is more like the House bill, creating a new system for setting variable student loan rates.
S. 1241, the Bipartisan Student Loan Certainty Act is Sen. Joe Manchin‘s (D-WV) bill to set all newly issued student loans to the U.S. Treasury 10-year borrowing rate plus 1.85 percent. The interest rate would be fixed over the life of the loan with a capped maximum loan rate of 8.25 percent.
Neither of the Senate bills has been scored in terms of its costs or savings, but the House bill saves about $22 per U.S. family. That’s because the increase in interest rates would reduce government outlays that subsidize student loans.