Industry Market Trends

What the Loan Deal Will Mean for Students Now -- and in the Future

Jul 24, 2013

Congress is set to approve a student loan deal that will cut interest rates for 11 million student borrowers this year, saving each undergraduate an estimated $1,500 over the borrowing period. Critics of the bipartisan compromise, however, contend that the deal, which would link interest rates to the market, will keep rates too high and subject future borrowers to greater costs. Here is a closer look at what students can expect.

According to a White House statement released yesterday, the student loan plan (applicable on new loans after July 1, 2013) will allow borrowers to lock in low interest rates currently available in the marketplace. This means that nearly 8.8 million undergraduate borrowers will see their loan rates decrease from 6.8 to 3.86 percent. Graduate Unsubsidized Stafford loans will decrease from 6.8 percent to 5.41 percent, and PLUS loan borrowers will see rates on new loans drop from 7.9 percent to 6.41 percent.

colllege savings_Career JournalThe deal will also put a cap on the new student loan interest rates to ensure that students are protected against future economic conditions that typically cause rates to fluctuate. Undergrad loans will be capped at 8.25 percent, along with a 9.5 percent cap on graduate loans and a 10.5 percent cap on PLUS loans.

Student interest rates doubled in July from 3.4 to 6.8 percent until the bipartisan compromise.

Although the deal will mean immediate savings for current students over the next few years, it may mean higher borrowing costs down the line, with current interest rates predicted to last only through the 2015 academic year. Noting this, both student advocacy groups and Democrats have urged Congress to reject the deal; some have argued that it will be a threat to the middle class and that it would not protect future students, who would shoulder the burden of federal government gains.

Opponents have pushed for an overhaul of the federal student loan program that would re-valuate the overall cost of college, The Washington Post noted.

One major opponent of the new deal, U.S. Senator Elizabeth Warren (D-Mass.), recently likened it to a "teaser rate for our loan system," which would ultimately amount to steep government profits over the next decade. She criticized Republicans for failing to support a bill that would have saved students from doubling interest rates. "I can't support a proposal that squeezes even more profits out of our kids," the senator said.

Senator Edward Markey (D-Mass.) voiced similar concerns, noting that rates might impede on student goals for higher education. "I will oppose plans that substantially increase the rates students pay now and in the future. Last year, the federal government made $51 billion from student loans," he was recently quoted as saying in MassLive. "That's just wrong. We should not make money off of the debt families incur in their efforts to help their children succeed."

Nonprofit organizations are also expressing concerns. Just this week, the Institute for College Access & Success (TICAS) issued a statement that underscored how the student rate deal is a "missed opportunity" to make college more affordable.

"Instead of making student loans more affordable for both today's students and tomorrow's, this deal locks in long-term changes that provide short-term benefits for current students by increasing long-term costs for future students," said TICAS President Lauren Asher. "Over the next 10 years it is expected to cost borrowers $715 million more than if current rates were simply left in place, and current rates are already projected to generate $184 billion in profit."

Proponents of the legislation, however, argue that the bipartisan deal is a good opportunity for students through 2015 and would help borrowers navigate the loan rates.

Senator Tom Harkin (D-Iowa), the chair of the Senate Health, Education, Labor and Pensions Committee, noted on the floor, as reported by the Associated Press: "It's the best that we can do...If we don't pass this today, there will be one sure effect: student loans will be almost twice what they would be under this bill."

What is your view on the student loan deal? Voice it in the comments section below.