The New Student Loan Law: Its Terrible, Fantastic & A Non-Event

Michael Lux Blog, News, Student Loans 6 Comments

Yesterday the Senate, by an overwhelming majority (81 to 18), passed legislation lowering the interest rate on student loans.  The President has endorsed the bill, and it is expected to easily pass in the house.  Is this new law to be a good thing or a bad thing?  It really depends upon your perspective.

Just the Facts

Prior to the passage of this law, student loan interest rates were set by Congress.  As part of the stimulus package, student loan interest rates had been lowered to 3.4%.  Last year, these rates were set to expire, but Congress extended the lower rates until July 1, 2013.  This year, after plenty of debate, July 1 came and went without a new law.  As a result the student loan interest rates were set to 6.8%.

Now, rather than Congress debating over the interest rate on student loans, rates will be set each year according to the 10-year treasury bond.  The interest rate will remain fixed for the life of the loan.  Undergraduates will be able to borrow at the 10-year rate plus 2.05% and graduate students will be able to borrow at the 10-year rate plus 3.6%.  For the upcoming school year, undergraduate loans will have a 3.86% interest rate.  Graduates will have a 5.41% interest rate.  The bill caps rates at 8.25 percent for undergraduates, 9.5 percent for graduate students, and 10.5 percent for PLUS loans for parents who borrow to pay for their children’s college.

The New Student Loan Law is Terrible!

If you are an Eighth grader planning on going to college and the economy has a strong recovery, you will be paying a lot for your student loans.  In fact, you may long for the days of the 6.8% interest rate.  You could easily end up paying 8.25% on your loans, and if your parents take out loans on your behalf, they could be as high as 10.5%.  That is nearly credit card interest rate territory!

Here are the projected interest rates for the next few years:

interest rates

Source: CNN Money based upon US Senate Data

Though the above numbers are a projection that could easily change, one thing is clear.  The stronger the economy, the worse this law is for college students.  In short, if you are a college student in a strong economy, this law is terrible!

This New Student Loan Law is Fantastic!

High school graduates of the class of 2013, this is the law for you.  Instead of being stuck with 6.8% interest rates, you will end up paying just over half that.  As long as the economy continues to be stagnant, you will continue to pay low interest rates on your student loans.As someone who complained about the inaction of Congress, I am glad to see that they were able to reach some sort of compromise to prevent the rate hike.


The New Student Loan Law is a Non-Event

For the people of America who collectively owe over One Trillion dollars on their student loans, nothing has changed.  Your bills will be exactly the same, and the burden will be unaltered.  The only difference is that now people in Congress may care slightly less about your troubles with student loans.

The cost of education continues to grow at a crazy rate, Congress will continue to profit off of student loans, and people struggling with debt will not get a lifeline.  President Obama did mention that this was just the beginning, promising “aggressive” ideas and stating that “If college costs keep on going up, then there’s never going to be enough money.”

What do you think of the new student loan interest rates?  Do you think this is the end of Congress addressing student loans or will this be an issue that continues to demand coverage?

  • That’s a big change in rates from 3.4 to 6.8. Even though I don’t have kids I feel like I should be putting aside a specific savings account for education. Costs keep going up, up, up.

    • That is very true. Regardless of what happens with interest rates, the costs of education continues to grow and it shows no signs of stopping.

  • When will this truly reach the point of being a bubble? That’s my question at this point, as a parent. The way I looked at education and going to the best school you can get into just doesn’t apply any more for most people. ROI and financial assessment is critical, people need to get a good value without crippling debt.

    • This is a fantastic question. It really seems like we should have hit the breaking point long ago, yet the situation gets worse by the year. I think part of the problem is the good debt myth, and people who are convinced that any student loan is going to be easy to pay back once they graduate. Sadly, this is not remotely true at all. The Return on Investment of a college education is not what it used to be.

  • Parents who want to help their kids pay for school but can’t afford to pay in cash will now pay 10.5% interest rates, ouch. I guess that’s further motivation to “make” parents save for their children’s school and pay in cash. I know that’s what I’ll be doing if I can afford it.

    • That is very true. It is definitely an incentive to get started early on a 529 plan.