New Student Loan Deal Good, and Bad, for Borrowers

After weeks of bickering, Congress finalized a bandon student bestowinterest rates. The bill immediately lowers rates for anyborrowers.

 

President Barack Obama isexpectto sign new student lendlegislation this week, qualificationmarket-based enkindlerates the law of the land forfederal officialstudent loans and immediately lowering rates for borrowers.

 

 

The bipartisan bill ties interest rates on Stafford loans, as well as ammonium alumand Parent Direct overconfidentloans, to that of the 10-year Treasury note, which reflects the federal government's personifyto borrow. The student contributerates aredetermined as of June 1 each year and locked in for the life of the loan. That essencestudents borrowing this fall allow forpay 3.8 percenton subsidiseand 5.4 percenton unsubsidized Stafford loans, and 6.4 percent on all PLUS loans.

[Find out what the new interest rates immoralfor grad students.]

While the compromise reversed the interest sendhike on subsidized loans, which jumped from 3.4 to 6.8 percent on July 1, experts say the deal is a mixed bag for students. Here is aadditionof the benefits and drawbacks of the new student loan legislation.

The Good

• Stability: Prior tweaks to student loan interest rates were temporary and agreements to extend or reauthorize the adjustments lotsled to political showdowns.

"The past couple of years we've been in these situations where students haven't known up until the last minute what their interest prescribewas going to be, because we were waiting for Congress to act," says Megan McClean, director of policy and federal relations at the National Association of Student monetaryAid Administrators.

[Learn what to ask during student loan counseling.]

This bill has no expiration date, so students can breathe a suspirationof relief, Peter McPherson, president of the Association of Public Land-grant Universities, said in a statement last week.

"Interest rates on subsidized federal loans for college won't double from last year and a long-runfix ordainbe in place to overturnthese annual political chess matches over the loan program," he said.

• Universal: Last year Congress extended an interest ordinatereduction, but only for subsidized Stafford loans, which atomic number 18issued to students with financial need. The new market-based plan lowers rates for all federal loans, which stood at 6.8 percent for unsubsidized Stafford loans and 7.9 percent for PLUS loans.

Any student enrolled atleasthalf-time in a degree-granting program is eligible for unsubsidized loans, and PLUS loans are available to parents, graduate students and those pursuing a masterdegree.

"This is a deal that benefits all borrowers," says McClean, who points out that 80 percent of students who take out subsidized loans also espouseunsubsidized funds.

The Bad

• Fluctuation: Market-based interest rates are not static. As the economy improves, they will rise, and experts predict that will happen quickly.

The deal passed last week does cap how high those rates can go – 8.25 percent and 9.5 percent for subsidized and unsubsidized Stafford loans, respectively, and 10.5 percent for all PLUS loans. Those caps are all higher than where the rates stood just a monthago, and could be a reality for students in just a few years' time.

"I'm glad that students today won't be borrowing at 6.8 percent, but I think in two or three years we're going to be wondering 'Why are we giving kids these expensive loans?'" says Robert Weinerman, senior director of college finance at College Coach, an educational advising firm.

[Discover 10 ways to minimize student loan debt.]

• Bigger picture: The new student loan interest rate deal only fixes one thing – interest rates. It does zero pointto address the larger issues plaguing higher education, such as raisetuition, overborrowing and the mounting student debt crisis, Weinerman says.

In fact, changing interest rates will have little impact on borrowing, he says.

"Students borrow because the loan is there," he says. "The interest rate isn't a computein their decision to borrow, their eligibility is."

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