Friday, President Barack Obama signed into law legislation that will tie student loan interest rates to financial markets.With the new law, rates are liable to change each year with fluctuations in the economy. Loan rates are tied to the yield on the 10-year Treasury note, plus a markup depending on the type of loan.
Students this year will borrow at around 3.8 percent for undergraduates and 5.4 percent for graduates, while parents taking out PLUS loans will borrow at 6.4 percent
Rates are capped at 8.25 percent for undergraduates, 9.5 for graduates and 10.5 for parent borrowers.
However, interest rates on the loans are expected to rise in tandem with rates on the 10-year Treasury note as the economy improves, which could lead to interest rates rising above the previous 6.8 percent for unsubsidized and subsidized loans and 7.9 percent for PLUS loans. Opponents of the bill are criticizing it as a guaranteed increase in student loan rates in the long run.
Approximately 47 percent of California State University students graduate with student-loan debt averaging $16,648, according to CSU Public Affairs.
The San Diego State Office of Financial Aid and Scholarships said it will start planning how best to notify students of the change to their loans next week.
“Now that we know the bill has been signed into law we can communicate the good news to the students that interest rates will be lower than they had been previously,” Chris Collins, associate director of the Office of Financial Aid and Scholarships, said.
This will be of particular importance to borrowers of unsubsidized loans, whose loans start to accrue interest once they are taken out. Collins said the new interest rates will retroactively modify loans taken out since July 1.
The law is the result of Congress’s efforts to find a long-term fix to the federal student loan program since interest rates on subsidized Stafford loans doubled to 6.8 percent on July 1. Interest rates for subsidized loans doubled when previous legislation expired. Though unsubsidized Stafford loans and PLUS loans were unaffected by the lapse of that legislation, the new law encompasses these as well.
Senate Republicans and Democrats reached a compromise on the legislation by agreeing to tie student loan rates to the government’s cost of borrowing money in exchange for a cap on how high student loan rates could go. In addition, the Senate included fixed rates on loans as part of its proposal, a feature not found in a bill passed earlier by the House, which would have allowed rates to fluctuate throughout the life of a loan.
Obama and Secretary of Education Arne Duncan have backed the bill, which they say would save 11 million students taking out loans this year $1,500 in interest on average.
