Graduation Nears for Market-Based Student Loans with Rate Caps

Graduation Nears for Market-Based Student Loans with Rate Caps The House of Representatives voted 392-31 Wednesday in support of a bipartisan deal to lower interest rates for millions of students seeking federal student loans.
The Senate passed the bill on July 24 and President Barack Obama is expected to sign it into law.
Politicians will no longer set rates, but the markets will — specifically 10-year Treasury notes. The president and Democrats pushed for rate limits as a buffer against market swings that would surpass the current 6.8 percent rate on subsidized Stafford loans.
At least in the short term, nearly 9 million undergraduate borrowers will see their rates on new loans drop from 6.8 to 3.86 percent under the deal.
But the measure that’s going to Obama’s desk pegs rates to the 10-year Treasury note — which adds 2.05 percentage points for undergraduates, and adds 3.6 percentage points for graduate student loans.
Another 1.5 million graduates with unsubsidized Stafford loans will see their rates drop on new loans from 6.8 percent to 5.41 percent.
And more than 1 million GradPLUS 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.
In the future, fixed rates will be tied to yields on U.S. Treasuries — helping ensure that borrowers’ rates are more in line with the government’s own cost of borrowing.
Undergraduate loans are capped at 8.25 percent, graduate loans at 9.5 percent, and PLUS loans at 10.5 percent. PLUS loans are taken out by parents who borrow to pay for their children’s college.
Interest rates on federal Stafford loans automatically doubled on July 1 to 6.8 percent after Congress failed to meet the deadline to prevent the rate increase.
“We wanted to get out of the partisan squabbling that has been happening in this city every year – let the market do it in a way that is fair to students and the taxpayer,” said House Education Committee Chairman Rep. John Kline, R-Minnesota.

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