According to the Project on Student Debt, 66 percent of college seniors graduate with approximately $26,600 in student loan debt. This large load of debt has been shown to cost students as much as $208,000 in wealth loss over their lifetimes. Fortunately, a law that recently passed through the House of Representatives and was signed into law by President Barack Obama has the potential to reduce this burden for students repaying student loans in the future.
The Effect of High Borrowing Costs
Because the cost of borrowing money to attend school is high, some wonder whether the reward of a higher salary later in life is worth the initial investment. A bachelor’s degree may be a helpful entry on a job application form, but students who take out loans lose a great deal of wealth in retirement savings and home equity. This often negates the benefits they gain from having an advanced degree in the first place. To combat this problem, lawmakers have been searching for ways to reduce the cost of student loans and make higher education a more lucrative investment for future students.
About the Student Loan Deal
Prior to Congress’s student loan deal, student loan interest rates varied considerably. However, under this new law, interest rates on student loans will mirror the yield on ten-year treasury bonds, and rates will remain locked in for the life of each loan. In addition, the rate on undergraduate loans will not be able to exceed 8.25 percent regardless of the bond rate. Rates on graduate loans can’t be more than 9.5 percent and rates on PLUS loans will be no higher than 10.5 percent, according to ConsumerFinance.gov.
For the current school year, students taking out Stafford loans will pay an interest rate of 3.86 percent for the duration of their loans, regardless of what happens in the market. Graduate loans will carry an interest rate of 5.41 percent and PLUS loans will carry a rate of 6.41 percent.
Affect on Students
The new student loan law is active immediately, so interest rates for loans taken out during the 2013-2014 school year are fixed. Because these rates are much lower than they would have been without the new law, students taking out loans this year will enjoy substantial benefits.
However, as the economy continues to improve, bond yield rates may increase dramatically, which will in turn increase student loan rates. If rates increase enough, government officials are concerned that the cost of borrowing may be even higher than it would have been without this new law. In fact, according to Fox News, President Obama indicated that the cost of education is still too high. The President also said that he will continue to pursue other options to make higher education more affordable for all students.
The recent changes to student loan laws will affect only those loans that are originated after the law was signed, beginning with loans for the 2013-2014 fall term. Students who have already taken out loans will continue to pay interest based on the contracts they signed when they originally obtained their loans.
To learn more about the new student loan law and how it may affect you, visit the House of Representative’s website. This site provides basic information about the law and its effects on the cost of higher education. Additional information about the government’s efforts to lighten the student loan burden can be found on the White House’s official website.