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Cost of Student Loans Increases as New Federal Law Takes Effect

Students and parents who take out federal loans to pay for college this fall will pay more as the result of legislation passed last summer that ties the interest charged on borrowing to market rates. 

Undergraduate students who take out federal Stafford loans will pay 4.66 percent on loans disbursed between July 1, 2014, and June 30, 2015—up from the current 3.86 percent. This will apply to both subsidized loans, in which interest doesn't accrue until after graduation, and unsubsidized loans, where interest accumulates while students are in school.

Under the new Bipartisan Student Loan Certainty Act, signed into law last August by President Obama, each year interest rates on student loans are set based on the outcome on the federal government's auction of U.S. Treasury's 10-Year notes, which was set May 7. The loans will have a fixed interest rate for the life of the loan.

Graduate students taking out direct unsubsidized loans will pay 6.21 percent in interest beginning in July, an increase from the current 5.41 percent. Interest on direct PLUS  loans, which can be taken out by graduate students or parents of undergraduate students to pay for college, will rise from 6.41 percent to 7.21 percent, with the new formula.

Prior to the new legislation, the interest rate on Stafford loans had doubled from 3.4 to 6.8 percent on July 1, 2013, triggering student advocates to push for a long-term solution.

(For details on federal student loans, see the U.S. Department of Education's Federal Student Aid website.)

As the cost of college rises, lawmakers are looking for ways cushion the blow. Earlier this week, U.S. Sen. Elizabeth Warren (D-Mass.) introduced the Bank on Students Emergency Loan Refinancing Act, which proposes allowing college graduates with outstanding student loan debt at high interest rates to refinance at the lower rates offered to current borrowers.

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