Student Loans Could Be Cheaper This Fall; Democrat, Republican Senators Agree To Link Student Loan Interest Rates To Market Rates In Future Years

on July 18 2013 2:55 AM
Student loan protestors
Occupy Wall Street demonstrators participating in a street-theater production wear signs around their neck representing their student debt during a protest against the rising national student debt in Union Square, in New York, April 25, 2012. Reuters

A bipartisan group of senators, on Wednesday, agreed on an outline for a deal to reduce interest rates on new federal student loans, achieving a breakthrough after weeks of discussions, to ease the burden on indebted students and limit soaring student debt, which exceeded $1 trillion last year.

The agreement, which needs to win the approval of the Senate and the House before taking effect, would limit the rate of interest to 3.86 percent on new federal Stafford loans availed this fall by undergraduates, while graduate students can borrow at 5.4 percent, and parents can get a loan on behalf of their college-going children at the rate of 6.4 percent, Associated Press reported, citing Senate sources.

However, the rates on loans in future years would be linked to the government’s borrowing costs, although Democrats won a cap to avoid the rates from climbing higher than 8.25 percent for undergraduate students. The cap for graduate students would be 9.5 percent, while the interest-rate limit on loans availed by parents would be 10.5 percent, AP reported.

The interest rate on Stafford loans doubled on July 1, climbing to 6.8 percent from 3.4 percent, after a subsidy on interest rates expired on June 30. Interest rates for graduate students and undergraduates, who borrowed money last year without the subsidy, remained steady at 6.8 percent, while parents continued to borrow at 7.9 percent.

The vote on the agreement, which would not affect loans borrowed before July 1, is expected any time before the middle of next week.

The interest rate on Stafford loans was set at 6.8 percent in July 2006, following a student campaign saying that a fixed rate was better than variable interest rates for student loans. 

About 40 percent of Stafford loans do not accumulate interest while the students are in school, shifting the burden to taxpayers, Sen. Chuck Grassley (R-Iowa) told the River Cities’ Reader in June.

Grassley said that about 7.7 million undergraduate students, in the 2013-2014 academic year, are expected to apply for Stafford loans with reduced rates.

“Earning an advanced degree is one way to scale the economic ladder of mobility in the United States,” Grassley said. “Although policymakers share a common goal to keep higher education attainable for the next generation, it is more difficult to reach a consensus on how to pay for that goal.”

The House is reported to support linking interest rates on student loans to bond-market rates. And, President Barack Obama’s long-term plan proposes to link student loan rates to the 10-year US Treasury bond rate, with different surcharges for Stafford loans based on whether they are subsidized or not.

“However, while the President’s plan maintains different rates for different loans, our plan would allow all students borrowing federal student loans to take advantage of the same low rate … It would help all students take advantage of historically low interest rates, including loans available to parents and graduate students,” Grassley said.

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