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2013 – 2014 Federal direct student loan rates

May 21, 2013 by Kenneth O'Connor

1 comment

Federal student loan policies are being legislated on capitol hill. Many students and families must again wait to find out what rate will be carried on federal direct loans for the upcoming 2013 – 2014 academic year.

Progress update: Inside Higher Ed reported that the House of Representatives Committee on Education and the Workforce approved legislation Thursday (5/16/13) that would create a variable interest rate for student loans. The committee voted 24 to 15 to send the measure to the full House of Representatives for consideration.

It’s deja-vu all over again, because in 2012 the federal loan rates were set to double but last minute deals locked in the 3.4% rate on subsidized Direct loans, and 6.8% on unsubsidized direct loans and 7.9% on all Parent Plus and Grad Plus programs were maintained. However, that extension of locked rates will soon end, and without further legislation, subsidized rates will double to 6.8%. It cost an estimated $6 billion to sustain the locked in subsidized rate for the past year.

If nothing is done, the rate on subsidized Direct loans will go back up to 6.8% on July 1 2013.

Here are details from the proposal:

H.R. 1911: The Smarter Solutions for Students Act: This proposal is similar to a plan put forth in President Obama’s Fiscal Year 2014 budget request, and includes the following.

  • Calculates subsidized and unsubsidized Stafford loans using a formula based on the 10-year Treasury Note plus 2.5 percent.
  • Calculates graduate and parent PLUS loans using a formula based on the 10-year Treasury Note plus 4.5 percent.
  • Resets student loan interest rates once a year, allowing rates to move with the free market and ensuring borrowers can take advantage of lower interest rates when available.
  • Protects borrowers in high interest rate environments by including a 8.5 percent cap on Stafford Loan interest rates and a 10.5 percent cap on PLUS loans.
  • Provides stability for low- and middle-income students working to finance their postsecondary education, and prevents future uncertainty about whether Congress is going to act in time to change the interest rate.

Points and counter points: However, this plan faces concerns over increased rate variability in the future that may lead to more costly repayment. Bill proponents counter that a market based rate is more fair and predictable than congressional politics, and students should not be held hostage to legislated rates, as demonstrated by the low market rates but high federal loan rates (6.8 unsubsidized and 7.9% Plus) available now.

What about consolidation? Will the federal Direct loan consolidation also be adjusted to accommodate these changes in loans? As it stands now, the Direct loans consolidation program uses the weighted average of interest rates from all applications to establish the new fixed rate going forward. Would consolidations for federal loans move to a variable rate as well? This proposal indicates that may also happen in the future.

What’s next? As explained by Libby Nelson “Congressional Democrats have said they’d want to tackle an interest rate overhaul when they rewrite the Higher Education Act, the law governing student aid programs, which expires at the end of next year, and not under the gun of a July 1 deadline.” However, this deadline was already established a year ago in response to the same problem, and it was kicked down the road during an election season where no politician wanted to potentially alienate younger, college aged voters. It remains to be seen what will actually happen to federal direct loan rates until congress decides again.

 

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  • http://www.graduatingfromdebt.com Kevin Watts

    Great post. I think this plan makes sense for the most part. What’s funny about this is this same incident happened last year as well. Let’s hope they get this deal done before July 1st.