Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

U.S. government lowers interest rates on student loans

A storm cloud of rising debt, hanging over millions of college students and their parents across America for just over a month this summer, has, for now, been lifted.

On Aug. 9, President Barack Obama signed the Bipartisan Student Loan Certainty Act of 2013 (H.R. 1911) into law, officially lowering annual interest rates on Federal Direct Student Loans for undergraduate students from 6.8 percent to 3.86 percent, according to the White House website. This applies to all Federal Direct Loans, except for Perkins Loans, and comes in response to a sudden doubling of student loan interest rates this July.

On July 1, the College Cost Reduction Act of 2007 (H.R. 2669) officially expired, removing Congress’s bandage on rising interest rates for student loans. This bill had steadily lowered interest rates over a five-year period to 3.4 percent, but called for rates to return to their original 6.8 percent if Congress failed to act by July 1, 2012. A one-year extension was passed on June 29, 2012, just two days before the deadline, which kept rates at 3.4 percent until July 2013. This year, however, Congress failed to extend the bill, and for just over a month the rates doubled back to their original 6.8 percent.

The Bipartisan Student Loan Certainty Act of 2013, officially introduced as the Smarter Solutions for Students Act and later retitled, was proposed to the House of Representatives by House Committee on Education and the Workforce Chairman John Kline and Representative Virginia Foxx.

The act bases the rate on the current 10-year U.S Treasury note interest rate of 1.81 percent, already a benchmark for many corporate and private loans. This is a flexible market-driven rate, to which a fixed percentage is added for different types of loans. The rate set by this formula is fixed for the life of any loan taken out during that time, and can be reset and adjusted once a year for new loans.

For undergraduate students, both subsidized and unsubsidized Stafford loans receive additions of 2.05 percent. This addition, plus the 1.81 percent on the 10-year Treasury note, yields the fixed rate of 3.86 percent for loans taken out in the 2013-2014 fiscal year.

Graduate student loans and parent or graduate PLUS loans receive higher rates than undergraduates; based on this formula, graduate students receive a fixed interest rate for 2013-2014 of 5.41 percent, while parents and graduate students with Direct PLUS loans receive a fixed rate of 6.41 percent. The new interest rates will be applied retroactively to all loans taken out after July 1, 2013.

The law also sets maximum caps on interest rates for Federal Direct Loans at 8.25 percent for undergraduates, 9.50 percent for graduate students, and 10.50 percent for Direct PLUS loans, to curb the possibility of a sudden or enormous jump in rates in the future.

According to University of Massachusetts Financial Aid Services, more than 11,400 students receive Federal Direct Loans.

“Politicians should not be in the business of setting student loan interest rates,” the House Committee on Education and the Workforce said in its official summary of H.R. 1911.

While promising stability and an end to unpredictable rate variations, the law still allows for rate adjustments set according to the free market. Instead, according to the Committee, the law relies on prevailing free-market based interest rates to determine interest on student loans. It operates with a baseline dependent on the 10-year Treasury note, which the House Committee on Education and the Workforce forecasts to be as high as 5.2 percent by 2018.

In an official statement from July 24, two weeks before the bill’s passage, the Obama administration endorsed the law. However, it admits that “[t]here is much more to do to ensure that college tuition and student loans are affordable for the middle class and those striving to join it.”

Conor Snell can be reached at [email protected].


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    Responda SimsSep 12, 2013 at 1:15 pm

    Maybe you can help me. My wages are looking to be garnished soon. I believe I owe 5000.00 to 6000.00 dollars, and at this point and time I cannot afford to pay off the entire loan. To add insult to injury I have to be out of my apartment by the last of this month. I would appreciate any help you can give me. Thanks.