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New Interest Rates Set on Student Loans With Enactment of Law

President Obama signed into law on Friday the Bipartisan Student Loan Certainty Act, tying federal student-loan interest rates to the market.

What does that mean for students and colleges?

Once the law was enacted, the new rates for all student loans (subsidized and unsubsidized) was set at 3.86 percent for undergraduates, 5.41 percent for grad students, and 6.41 percent for parents taking out PLUS loans for college expenses.

The rates are retroactive applying to all loans processed since July 1, 2013.

These new loan terms will be in effect for one year. Every June, they will be recalculated based on the U.S. Treasury 10-year borrowing rate and a new percentage set on July 1.

Under the new law, interest rates are capped at 8.25 percent for undergraduates, 9.5 percent for graduate students, and 10.5 percent for parent loans.

"In a time when Congress is passing fewer laws, it's a big positive for students and families," says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators.

Within 120 days of enactment, the law calls for the U.S. comptroller general to complete a study of the actual cost to government of carrying out the federal student-loan programs. The report is to be presented to the Senate Committee on Health, Education, Labor, and Pensions and the Committee on Education and the Workforce of the House of Representatives.

Draeger says the report will guide discussion of the reauthorization of the Higher Education Act, which will likely include revisiting interest rates and bigger-picture issues of college financing.

The new law is viewed by many as a long-term solution to the interest-rate question, but not all student groups have been supportive. (Education Trust, the Institute for College Access & Success, and U.S. PIRG have been among those concerned about the impact of the new law.) Some are holding out hope that interest rates and larger college-affordability issues will be addressed in the upcoming reauthorization debate.

This summer lawmakers dealt with a political crisis but missed a broader opportunity, says Michael Dannenberg, director of higher education policy at the Education Trust, a nonprofit in Washington. "The final deal ameliorates the symptoms of the underlying disease. It makes student loans slightly more affordable in the short term, but not the long term," he says. "The disease is college cost and affordability and students having to borrow too much."

Dannenberg said Obama's recent economic speeches indicate there may be more action dealing with college-cost issues even before the reauthorization. "Our view is that what's needed is a major play to slow tuition growth and improve high school preparation for college," he says.

Too often, students have to take remedial classes because they aren't ready for college-level work, and improving high school preparation can get students to a degree more quickly, saving them money, he adds. Also, there needs to be changes to the "dysfunctional higher education marketplace" that has no real quality checks to keep prices in line, he says.

Dannenburg says the K-12 community needs to play a more vigorous role in calling for higher education reform, as success of one system is closely tied to the other. In addition to the efforts to equip consumers with information on college choice, students also need to be protected from bad providers.

Chris Lindstrom of U.S. PIRG anticipates lawmakers won't likely be motivated on their own to revisit the student-loan issue in the reauthorization of the HEA. It could resurface, however, depending on the findings of mandated study or if interest rates go up more quickly than predicted, she says.

Her organization would like to see cost transparency incorporated into HEA. While the Department of Education's voluntary college comparison shopping sheet was a good step, Lindstrom says all colleges should be required to provide the information on costs, loan packages, and grant awards to help families understand the total price.

The Institute for College Access & Success has proposed major changes to the student-loan program, pushing to simplify the way federal student aid is applied for, allocated, delivered, and communicated; to reward colleges that serve low-income students well; and to hold colleges accountable for the taxpayer funding they receive.

Congress has had various approaches to setting student-loan interest rates since the program began in the 1960s.

In 2006 when the rate was fixed at 6.8 percent, Congress approved temporarily cutting the rates for subsidized Stafford loans to 3.4 percent. When the lower rate was set to expire in 2012, lawmakers extended it for one year. This July, Congress failed to reach an agreement, and the rates automatically rose again on July 1 to 6.8 percent.

The new law is expected to save the average undergraduate student $1,500 over the life of a loan and affect 11 million borrowers.

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