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Education loan relief is on the way for today’s college students and their parents, at least in the short-term.  Congress just passed, and President Obama is expected to sign into law, a compromise bill that keeps student loan interest rates low for today’s crop of college students, while minimizing the cost to the federal government in the long run. This is great news for students on campus this fall, who have been anticipating borrowing at twice the interest rate of last year’s loans.

When prior student loan regulation expired on July 1 and Congress failed to act, the interest rate on the Subsidized Direct Loan doubled from a fixed 3.4% to 6.8% for all future borrowers. Congress continued to negotiate after the July 1 deadline, however, and have now passed a compromise bill that will tie Direct and PLUS Loan interest to financial market rates, and will be retroactively applied to all borrowers since July 1, 2013.

New Student Loan Bill Rate Details

Moving forward, federal education loan rates will be set annually at a rate equal to the high yield of the 10-year treasury note sold at the final auction held prior to June 1 plus a particular point spread determined by the type of borrower:

  • Undergraduate student Direct Subsidized and Unsubsidized Loan borrowers will pay a rate equal to the 10-year T-Note + 2.05%, capped at 8.25%.
  • Graduate student Direct Unsubsidized Loan borrowers will pay a rate equal to the 10-year T-Note + 3.6%, capped at 9.5%.
  • Parent Direct PLUS Loan borrowers will pay a rate equal to the 10-year T-Note + 4.6%, capped at 10.5%.

Under the new formula, education loan rates for the 2013/14 school year have been calculated at:

  • 3.86% for undergraduate students (compared to 3.4% for Subsidized Loans and 6.8% for Unsubsidized Loans in 2012 – 2013)
  • 5.41% for graduate students (compared to 6.8% in 2012 – 2013)
  • 6.41% for parents (compared to 7.9% in 2012 – 2013).

These rates are fixed for the life of the loan, though loans borrowed in future years will be calculated based upon the future year’s treasury note rate.

New Student Loan Bill Benefits Today’s Borrowers

This legislation, tying student loan rates to financial markets, is therefore a boon to the class of 2013 and continuing students in this low interest rate environment, as each of the above rates is lower than the prior fixed interest rates offered to students and their parents.  The legislation may not be as beneficial to borrowers in future years, however, for as the economy improves and interest rates rise, so too will student loan rates.  These market-based rates will minimize the costs to the federal government, while caps were put in place to ensure that an excessive debt burden will not be borne by education loan borrowers in high interest rate environments.

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Written by Shannon Vasconcelos
Shannon Vasconcelos is a college finance expert at College Coach. Before joining College Coach, she was a Senior Financial Aid Officer at Tufts University and Boston University.