Congress Approves Lower Student Loan Rates!

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They said it could not be done!  However, we finally have a decision from Congress on the student loan rates that will apply to college borrowers! Many college students and their parents borrow each year in order to pay for college but the loan terms were in limbo. Federal student loans rates are usually set by June 30th.  However, this year, they were hung up in both the Senate and Congress due to bipartisan disagreement. Earlier in July the House passed a bill that set interest rates at 6.8% plus fees for both subsidized and unsubsidized loans and 7.9% for parent loans. There was uproar from Senator Elizabeth Warren of MA because the limited amounts of subsidized loans are given only to the neediest of students whose family income is less than $23,550 for a family of 4, or live at or below the poverty line as defined by the Department of Health and Human Services. Finally, on August 2nd 2013, new rates were approved and they sound a lot more appealing—if loan interest rates and fees can ever sound that way.

College students going back to school this Fall 2013 will enjoy lower rates until June 30, 2014 thanks to the passage of HR-911 “Bipartisan Student Loan Certainty Act of 2013”. The bipartisan agreement sets interest rates at 3.86% for both the subsidized and unsubsidized Stafford loan for undergraduate students. The Stafford Loan for graduate students is now 5.41% plus origination fees.  Parents of undergraduate students often borrow from the federal PLUS loan in order to pay for their expected contribution or the gap between what the student is eligible to borrow and the remaining amount left to pay. That rate is 6.41% plus a fee.

This year’s rates can be said to be competitive in the market place, especially when compared to private bank loans like Discover student loans that offer a fixed rate of 5.49% or variable rate pegged to the Prime Index (currently 3.25% APR) with zero fees—but they don’t spell out what the cap might be.  During repayment, banks want their money. Federal loans on the other hand, provide advantages such as deferment and forbearance if students lose they job or suffer hardship, in addition to flexible repayment options such as income-contingent and Pay-As-You-Earn plans. The commercial loans are marketed more attractively, with reassuring and persuasive phrases as: “There’s no need to worry, you can borrow up to 100% of costs, and the amounts are certified by your college financial aid officer so you will not borrow more than you need.

In the case of federal loans, the cap on the interest rate is clear. No matter what the rate might be on the last sale of the 10-year Treasury note in June, the Stafford loan rates for undergraduate students will not rise above 8.25% and 9.5% for graduate students. Parents and graduate students borrowing the PLUS loan will not go over 10.5%. These rates are pegged to the ten-year treasury note, and once Congress approves that rate each year,  it will remain so for the life of the loan. Hopefully, federal loan rates will remain way below those caps.


About the Author:

Claire Law
Claire is an IECA Professional Member and a Certified Educational Planner (AICEP) located in Charleston, South Carolina.