Public debate has raged for years about reforming student loans. While the housing crisis, once the only loan debate in town, seems to have somewhat subsided over the last 5 years, student loan debt is “the only form of consumer debt that has grown since the peak of consumer debt in 2008,” according to the Federal Reserve Bank of New York.
With student loan debt topping $1.2 trillion in May, 2013, students, tax-payers, educators and politicians are advocating for a solution to the problem. Recently, congress approved the Bipartisan Student Loan Certainty Act of 2013, a deal aimed at easing the financial burden of higher education for students and taxpayers. The bill has been met with enthusiasm, as well as criticism. The general consensus from education groups (who largely disapprove of the bill) is that students will ultimately pay far more under the new plan than they would have before, despite the low starting interest rate. Still others—including Ohio representative John Boehner, who calls the bill “a victory for students, for parents, and for our economy”—believe the bill is a welcome relief to the student debt problem.
On Wednesday, July 24, 2013, the Senate overwhelmingly passed a bill regarding student loan interest rates, aptly named the Bipartisan Student Loan Certainty Act of 2013. The Senate passed the bill 81 to 18, and it was then sent to the House, which passed it with even greater strength, 392 to 31. When the President of the United States recently signed off on it, the bill was retroactively effective July 1, 2013 (meaning it will apply as though it had been passed on July 1).
The bill is relatively straightforward, and represents a step in the right direction for bi-partisan law making, given how easily it passed. It seems both sides of the political spectrum were in favor of the bill (though Republicans were more so than Democrats—17 of the 18 “no” votes in the Senate came from Democratic Senators).
The purpose of the new student loan interest rate bill is to lower the cost of loan repayment for students, while keeping them intrinsically linked to the state of the economy. The theory behind it is that the United States needs to take care of both students and taxpayer’s—help the former, but not at too big of an expense to the latter. While the bill is fundamentally designed to make life easier for students with loan debt, it takes into account the fact that the market in the U.S. ebbs and flows. Ultimately, the politicians agreed, student loan interest should ride the same waves as the rest of the economy, ebbing and flowing with the market.
What are the New Interest Rates?
For this year (as aforementioned, starting retroactively on July 1, 2013), the interest rates for newly issued loans will be as follows:
- Subsidized undergraduate student loans will be just 3.8%—a large improvement from the previous 6.8%.
- Unsubsidized Stafford loans will have interest rates set at 5.4%.
- For graduate students with subsidized loans, the interest rate will be 5.4%.
- All PLUS loans (for graduate students or parents of students) will be set at 6.4%.
While rates are fixed, they are also tied to 10 year Treasury notes. That means that those taking out loans this year will have a fixed interest rate of 3.86% (for subsidized undergraduate loans), but those taking out loans next year will have a different rate, and so on and so forth. As such, student loan interest will only rise as the economy continues to rebuild itself and overall interest rates rise. There is, however, a cap—meaning that there’s a limit to the amount of interest charged.
Education Secretary Arne Duncan estimates that the bill will save students an average of $1,500 in each loan at the current rate, which is certainly a substantial amount for the roughly 11 million students it would currently affect.
From a taxpayer perspective, this is another win, as the Congressional Budget Office estimates that, over the next 11 years, taxpayers will save $715 million with the passing of this bill (based on the assumption that they will not have to cover amounts owed by students who default on loans).
Why Students are Torn
The deal is an emphatic improvement on interest rates in the short term, since current rates are higher than the ones listed above. Furthermore, all of the repayment benefits remain, such as teacher loan forgiveness. However, critics worry that the interest rates of students’ loans, which are tied to the economy, will go up (beyond what they would have prior to the bill) as the performance of the economy improves.
While current rates still represent historic lows, they will not remain at these levels indefinitely. The bill offers cap provisions (8.25% for undergraduate loans and 9.5% for graduate loans for students) that are meant to keep student loan interest rates from skyrocketing to above 20%. Yet students and educators argue that the caps are higher than the 6.8% rate students would be paying without the bill in place. It stands to reason that a stronger economy, which would trigger higher interest rates, would grant graduates more job opportunities; however, this is not always a certainty, and some students may risk facing a tough job market and higher student loan interest rates.
Last but not least, some opponents of the bill do not believe the legislation solves the student debt crisis in the long-term. Says Massachusetts Senator, Elizabeth Warren:
“I don’t think we should be making profit off the backs of our kids when they are trying to get an education. That’s going to be a big issue. There’s two things we have to do; we have to bring down the cost of college. The cost just keeps climbing, and that’s bad for our kids who need to get an education. The second thing we need to do is we have got to concentrate on a trillion dollars of outstanding student loan debt.”
The rising cost of tuition as whole has, thus far, not been addressed by the student loan deal.
The Future of Student Loans
In the coming months and years, the new student loan interest rate bill will be heavily discussed. And while it is encouraging to see both parties come together to pass a bipartisan law regarding education, it remains to be seen whether this is actually a step forward in the education of our youth.
About the Author:
Today’s guest article comes from Logan Wheeler, a freelance blogger and recent college graduate currently residing in Houston, Texas. When he isn’t learning more about the byzantine rules and regulations surrounding his college loans, he is at work earning his license to become a freight forwarder in Houston.