Student loan interest rate capped at 8.25%

People walk past the Alma Mater statue on the Columbia University campus on July 1, 2013 in New York City.

Looks like student loan rates are not going to be twice what they were just a few weeks ago – not now, anyway. This week the Senate voted to link those interest rates to 10-year Treasury notes. The House is also expected to sign off on the plan.

The deal came after rates for federally subsidized undergraduate loans shot up automatically on July 1, from 3.4 to 6.8 percent. Under the Senate plan, they'll just bump up slightly -- in line with market rates.

Matt Chingos, a Fellow at the Brookings Institution's Brown Center on Education Policy, says students will come out ahead in the short-term. Chingos says if the rates had stayed double, a student owing $27,000 after graduation would spend the next decade paying $327 per month.

"Now under the Senate plan, students instead will pay $285 a month," he says. "So a significant reduction."

That works out to about $5,000 in total savings over the course of a loan. But it doesn't mean rates will stay low forever. As market interest rates go up so will rates for federal student loan. The deal would cap them at 8.25 percent for undergraduates, and a bit higher for graduate students and parents who take out loans for their children.

Student loan advisor Heather Jarvis thinks graduates will be worse off. 

"Student loan interest rates under this bill are projected to rise over time, and will likely be higher than the current 6.8 percent within the next several years," Jarvis says.

But Matt Chingos of Brookings says that's fine with him. After all, higher interest rates tend to be a sign of a stronger economy -- one where it's easier to pay off those loans.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...