By: Gina Luke, assistant director, Governmental Relations Division
Undergraduate students across the nation groaned on July 1 when the interest rates for subsidized Stafford Loans doubled from 3.4 percent to 6.8 percent. These students can now breathe a sigh of relief with both chambers of Congress recent passage of the Smarter Solutions for Students Act (H.R. 1911), which included an amendment (S. 1334) to establish student loan interest rates.
The U.S. Senate passed the bill on July 24 with a vote of 81-18, and the U.S. House subsequently passed it on July 31 with a vote of 392-31 (10 Representatives abstained). The legislation will now go to President Obama for his signature.
H.R. 1911 will shift interest rates on student loans from a fixed interest rate to a variable, market-based rate that is tied to the 10-year Treasury note, not the daily rate. This means that each year’s interest rates would reset annually on July 1 based on the previous May’s auction of 10-year Treasury bills. For instance, loan rates for the 2013-2014 school year would be based off the 1.81 percent rate from this past May, not the current yield that reset after July 1 of 2.5 percent. Loan rates would be capped for the life of the loan at 8.5 percent for undergraduates, 9.5 percent for graduate-professional students (such as veterinary medical students), and 10.5 percent for PLUS loans (which are loans taken out by graduate students and parents on behalf of their children).
The legislation sets the interest rates each academic year by taking the 10-year Treasury note and adding: 2.05 percent for both the subsidized and unsubsidized portions of the undergraduate loans; 3.6 percent for graduate-professional loans; and 4.6 percent for PLUS loans. Based on the current 10-year Treasury rates, unsubsidized Stafford loan interest rates for veterinary medical students would be reduced from 6.8 percent to 5.41 percent, while PLUS rates would be reduced from 7.9 percent to 6.41 percent. The rate on undergraduate loans would remain at 3.86 percent.
Senate supporters claimed that interest rates will remain below the current 6.8 percent rate for at least the first three years of the legislation’s implementation. However, 18 senators who opposed the measure said that future students could face much higher rates if the interest rates on the 10-year Treasury note increase.
The Congressional Budget Office (CBO), which provides a nonpartisan analysis of the federal budget and the economy to Congress, anticipates that interest rates will eventually increase above current levels as the economy improves. The CBO estimates that the bill would reduce the deficit by $715 million over the next decade, during which federal loans would be a $1.4 trillion program.
With nearly one in five American households holding student loan debt, according to the Pew Research Center, the issue will continue to percolate in Congress. The Federal Reserve Bank of New York has stated that aggregate student loan debt, which is nearing $1 trillion, is becoming second to mortgages in the amount of consumer-held debt.
It is expected that Congress will again grapple with student loan interest rates in addition to college affordability, institutional accountability, accreditation and an array of other education-related issues as it begins work in the fall on reauthorizing the Higher Education Act, which is due by 2014.