The debate over student loan interest rates has officially come to an end with President Obama’s signature, a move that takes the cost of borrowing for college out of the hands of politicians and into the still uncertain realm of financial markets.
But there are limits established to protect students and their parents from big market hikes. And for now, rates will be lower than the 6.8 percent undergraduate, subsidized rate.
Most significantly, nearly 11 million borrowers will see their interest rates decrease on new loans made after July 1, 2013.
The President signed the bipartisan student loan interest rate compromise on Friday. The U.S. Department of Education will now retroactively apply the new rates to loans taken out since July 1.
The change is expected to only take a few days to implement — just before college fall semesters get underway across the nation.
“In the weeks and months to come, the Administration will continue to work with Democrats and Republicans in Congress to tackle rising college tuition and unaffordable debt, forging ahead on the important work of putting higher education in reach for every American,” said Cecilia Muñoz, assistant to the President and director of the Domestic Policy Council, which coordinates the domestic policy-making process in the White House.
Here’s an overview of what the compromise means to college student borrowers and their parents:
Interest rate reductions:
Under the new law, nearly 11 million borrowers will see their interest rates decrease on new loans made after July 1, 2013.
- About 8.8 million undergraduate borrowers will see their rates on new loans drop from 6.8 to 3.86 percent.
- About 1.5 million Graduate Unsubsidized Stafford borrowers will see their rates drop on new loans from 6.8 percent to 5.41 percent.
- More than 1 million Grad PLUS and Parent PLUS borrowers will see their rates on new loans drop from 7.9 percent to 6.41 percent — the first reduction in years.
The plan caps how high student loan interest rates can rise -— a key provision pushed by Senate Democrats —- giving students protection against future economic conditions.
- Undergraduate loans are capped at 8.25 percent.
- PLUS loans at 10.5 percent.
These loans also include fixed interest rates over the life of the loan, protecting students from the risk that rates will fluctuate over time and providing certainty for borrowers.
- A typical undergraduate borrower who borrows $6,922 will save about $1,545 over the life of those loans.
- A graduate borrower who borrows $25,666 will save $2,913 over the life of those loans.
- The average parent borrowing $17,980 working hard to support their child’s college education will feel the relief of $2,066 in savings on the loans they take out next year.