08.02.13 | The Usual Mistrust or a Preview of More Bipartisanship?

Posted in Financial Aid, News, Stafford Loan, Student Loans by David Levy

Federal Student Loan Compromise

This content was updated on 7/9 to reflect the passage of the Smarter Solutions for Students Act

With bipartisan support, on July 31, 2013, the House of Representatives passed H.R. 1911, the Smarter Solutions for Students Act (also known as the Bipartisan Student Loan Certainty Act, as amended by the Senate), by a vote of 392 to 31.

President Obama  signed the legislation into law on August 9, 2013.

Under the new law, interest rates on new loans each July 1 will be based on the last 10-year Treasury auction in the previous May. The specific interest rates will be as follows:

  • Undergraduate Students (Subsidized and Unsubsidized Federal Stafford Loans): 10-year Treasury + 2.05% with an 8.25% cap
  • Graduate and Professional School Students ( Federal Stafford Loans): 10-year Treasury + 3.6% with a 9.5% cap
  • Parents and Graduate/Professional School Students (Federal Parent and Federal Grad PLUS Loans): 10-year Treasury + 4.6% with a 10.5% cap

Based on the current 10-year Treasury rate, this will yield interest rates of 3.86%, 5.41% and 6.41%, respectively, for new loans this year, made after July 1, 2013. (more…)

07.25.13 | Doubling Interest Rates: The Devil is in the Details

Last night, the Senate passed a bill to address the doubling of the interest rate on new subsidized Federal Stafford loans.

The Congressional Budget Office (CBO) estimated that the legislation will save the federal government $715 million over ten years, which would be applied to deficit reduction. Many feared that the multi-partisan Senate deal would fall apart because the CBO found that an earlier version would cost $22 billion over ten years.

Under the Senate-approved legislation, interest rates on new loans each July 1 would be based on the last 10-year Treasury auction in the previous May. The specific interest rates would be as follows:

  • Undergraduate Students (Subsidized and Unsubsidized Federal Stafford Loans): 10-year Treasury + 2.05% with an 8.25% cap
  • Graduate and Professional School Students ( Federal Stafford Loans and Federal Grad PLUS Loans): 10-year Treasury + 3.6% with a 9.5% cap
  • Parents (Federal Parent PLUS Loan): 10-year Treasury + 4.6% with a 10.5% cap

Based on the current 10-year Treasury rate, this would yield interest rates of 3.9%, 5.4% and 6.4%, respectively, for new loans this year, made after July 1, 2013.

According to Mark Kantrowitz, publisher of Edvisors, “This is still an interest rate increase masquerading as a decrease. Interest rates are at historically low levels and have nowhere to go but up. We can expect interest rates to start increasing by about 1.5% per year in 2015.” These federal educational loan rates are expected to climb as the economy improves and it becomes more expensive for the government to borrow money. Thus, interest rates on new loans will probably exceed the current 6.8% rate in 2017 and certainly by 2020. “So, while students enrolling in college now will save money on their student loans, their younger siblings will pay a lot more. A few years from now students and parents will be demanding a return to fixed 6.8% interest rates.”
(more…)

07.01.13 | 3 Things You Should Know About the Stafford Loan Interest Rate Increase

Posted in News, Stafford Loan, Student Loans by Student Loan Network Staff

As you may have heard, the interest rate on subsidized Stafford loans just increased from 3.4% to 6.8%, effective July 1, 2013. Congress wanted to keep rates down, but the deadline hit before all parties could agree on a course of action. Here’s what you need to know about these changes.

1. It only affects new loans

I’ve received a lot of questions lately about the impact of this rate increase. It seems like graduates everywhere are concerned that their student loan payments will soon be skyrocketing. The good news is, it’s not retroactive — meaning it won’t affect any subsidized loans originated before July 1, 2013. So for borrowers who are currently repaying older loans, don’t worry, you’re in the clear.

However, the new rate will impact loans originated after July 1, 2013. This means any new subsidized loans will have the 6.8% rate. Despite this rate hike, subsidized loans are still a better deal for borrowers because the interest subsidy remains intact.
(more…)

06.26.13 | Will Student Loan Interest Rates Double on July 1?

Posted in Financial Aid, News, Stafford Loan by Mark Kantrowitz

If Congress does not act, interest rates on new subsidized Stafford loans will double from 3.4% to 6.8% on July 1, 2013. Previously originated subsidized Stafford loans and all other education loans will not be affected.

Doubling of the interest rates certainly sounds dramatic, but the actual impact on students will be more muted.

Each year, less than a third of undergraduate students receive federal subsidized Stafford loans. The average subsidized Stafford loan is $3,357, based on data from the 2007-08 National Postsecondary Student Aid Study (NPSAS), with average subsidized Stafford loan debt at graduation of $9,008 ($11,329 for Bachelor’s degree recipients). Only 3% of subsidized Stafford loan borrowers graduate with debt equal to the aggregate limit of $23,000.

Assuming a 10-year repayment term, doubling of the interest rate on $3,357 in debt increases the monthly loan payment by less than $7. On $9,008 in debt, the increase is less than $18; on $11,329 the increase is less than $24; and on $23,000 the increase is less than $48.

Doubling the interest rate does not double the monthly payment. Most of the monthly payment goes to principal, not interest. For example, on a 10-year term, increasing the interest rate from 3.4% to 6.8% increases the monthly payment by about one sixth (16.9%).

So while the interest rate increase will increase borrowing costs, it is not a major disaster.

Focusing on the interest rates, on the other hand, is a distraction from the real problem (more…)

06.14.13 | 5 Solutions to the Subsidized Student Loan Debate

Posted in Financial Aid, News, Stafford Loan, Student Loans by Student Loan Network Staff

Over the past month, you may have heard about the impending subsidized student loan interest rate increase, as politicians frantically work to come to a consensus before July 1. Right now, subsidized student loans interest rates currently stand at 3.4%, but will increase to 6.8% unless a new bill is passed by July 1.

With this decision having a major impact on your future, it is important to stay up to date with the issue and the suggested solutions.

1. Default Solution: Increase to 6.8%

As stated above, if politicians fail to come to an agreement, the interest rate for subsidized loans will increase to 6.8%.

2. Democratic Solution: Student Loan Affordability Act

Most Democrats in the House of Representatives argued for a two-year extension on the 3.4% interest rate, which would maintain the current interest rate and bring the question to Congress again in two years. However, this bill was rejected in the Senate on earlier this month.

3. Senator Elizabeth Warren’s Solution: Student Loan Fairness Act

Senator Warren proposed a bill which would dramatically cut the interest rate on subsidized loans. Citing the fact that the student loan debt now exceeds $1 trillion, Warren proposed cutting the interest rate to 0.75%, which is the same rate that banks are able to get from the government. For more information, please see our recent article on the details of Warren’s bill.
(more…)

06.11.13 | Impacts of the Potential Stafford Loan Rate Increase

Posted in Financial Aid, News, Stafford Loan, Student Loans by Student Loan Network Staff

Student Loans in the MediaWith the recent legislation involving the subsidized student loan interest rate, many have begun to express concern towards the fact that if Congress is not able to reach an agreement by July 1, subsidized Stafford loan interest rates will automatically increase from 3.4% to 6.8%.  In the process, many news sources have erroneously been reporting that this increased interest rate would yield an additional $1,000 in annual debt for the average borrower. However, this figure is much lower in reality.

Using the loan repayment calculator from Finaid.org, we can begin to calculate more-accurate rates (though still estimates). Assuming a student borrows $23,000 over the course of four years—the maximum amount that can be taken out for undergraduate studies—the annual increase will be less than half of what has been reported.
(more…)

05.23.13 | Smarter Solutions for Students Act

Posted in Financial Aid, financial aid tips, News, Stafford Loan, Student Loans by Student Loan Network Staff

As you may recall, last year, Congress voted on whether to raise the subsidized Stafford loan interest rate to 6.8%, or keep it at 3.4%.  Congress decided to prolong the decision for another year and keep the subsidized interest rate at 3.4%.  However, a year has gone by, and it is once again time for Congress to vote.  If Congress fails to come to a consensus by July 1, the interest rate on subsidized loans will automatically double to 6.8%.

In response to this impending decision, several politicians have put forth ideas of what they deem to be the best solution.  On May 1, Senator Elizabeth Warren proposed the Bank on Students Loan Fairness Act, which sought to lower the interest rate on subsidized loans to just under 1%, which she described as the equivalent rate for which banks qualify.
(more…)

05.16.13 | Elizabeth Warren Calls for Student Loan Changes

Posted in Financial Aid, News, Stafford Loan, Student Loans by Student Loan Network Staff

Last year at this time, the big issue in the news was the impending doubling of student loan interest rates. The interest rates of Subsidized Stafford Loans were set to double from 3.4% to 6.8%. Before this could happen, Congress stepped in, temporarily lowering them for another full year.

That extra year of low rates is now coming to a close, and rates are once again set to double. This is why Senator Elizabeth Warren has introduced the Bank on Students Loan Fairness Act. This act would allow students to borrow at the same rate as banks, which is about “one-ninth the amount that students are asked to pay”.

Here is a quick list of what this bill seeks to do:

  • The bill would charge students a rate equal to the rates banks are getting from the government (for subsidized loans only)—a rate of less than 1%.
  • Loans would be funded through the federal reserve, with administration by the Department of Education

Senator Warren gives an excellent overview in her introduction of the bill to the Senate Committee. Watch it below.

04.16.13 | When to Get Student Loans

Clock Tower in SpringFamilies everywhere are currently sweating over financial aid award letters, trying to decipher aid and make the huge decision about which school is the right choice for both the student, and family finances. However, once the college decision is made, there is still a lot to do, including applying for student loans!

To help families through this award letter season, here is a breakdown of how and when to accept—or apply for—all types of student loans.

Perkins and Stafford Loans

When to Accept: April-May for Fall semester
How: For these loans, students can simply accept their loan amounts through the financial aid office. To finalize the acceptance and before they can receive the loan funds, students must complete a Master Promissory Note (MPN) online at StudentLoans.gov and complete an entrance counseling session as directed by the school.
(more…)

04.10.13 | Stafford Loan Déjà Vu: Interest Rates Set to Double Once Again

Posted in Financial Aid, Private Student Loans, Stafford Loan, Student Loans by Student Loan Network Staff

2012 Interest Rate Increase

Last year around this same time, a hot story in the media was the impending interest rate increase for Federal Direct Stafford Loans. Subsidized loans were at 3.4%, and with legislation running out, were set to double to 6.8% — the same as their unsubsidized counterparts. Luckily for students, Congress extended the lower interest rate for another year.

Projected Rates for 2013–2014

Once again, subsidized student loan interest rates are facing an impending increase, and are still up in the air. Without action, students may see an increase to 6.8% for the 2013–2014 academic year. This means that the only difference between subsidized loans and unsubsidized student loans would be that the former will not accrue interest while in school or in a grace period.

At this time it is unclear what actions may be taken to prevent student loan interest increases. We could see another one-year extension of the lower rate, or a system overhaul may even be possible. However, if nothing is done by July 1, 2013, students can expect to see the higher rate take effect for all new subsidized loans.

The Future of Federal Student Loan Rates

Private student loan rates are currently based on an index rate (such as the Prime or LIBOR indeces) plus a set margin. This allows for flexibility based on the current market. Federal student loan rates do not follow this structure, and are not tied to any economic factors, making it difficult to set competitive and affordable rates for borrowers.

To rectify this, organizations such as the New America Foundation have submitted proposals for better ways to handle federal loan interest rates. The proposals include tying interest rates to 10-year treasury notes and securities. Rates would be determined similarly to private student loans, with a variable base, plus a proposed margin of 3.0%.

While it is unclear which, if any, of these proposals will be enacted, it’s possible that borrowers could see more affordable rates in the near future.

For more information on interest rate proposals, read Solving the Interest Rate Quandary: Two Feasible Proposals on NASFAA.org.