The New Student-Loan Math

"Congress is close to tying student-loan interest rates to current market rates, which would reduce borrowing costs for college students this year—but could be costly to future scholars," The Wall Street Journal reports. "Under the plan passed Wednesday by the Senate and still subject to approval by the House of Representatives, undergraduate students this coming school year would pay 3.86% interest on all federal Stafford loans. The rate would be based on a 10-year Treasury auction rate, meaning that students would borrow more like home buyers, subject to the market rate when they reach college age. But today's Treasury rates are unusually low, and future students could pay a whole lot more when rates go higher. Since students take out a new loan each year, the changes mean graduates could have multiple loans at different fixed rates. Their monthly payment will be a weighted average of those rates, says Justin Draeger, chief executive of the National Association of Student Financial Aid Administrators. Those proposed student-loan rates are far lower than the current 6.8% on Stafford loans, the most common student loan. Until July 1, though, rates on subsidized Stafford loans, available to those with financial need, were 3.4%. Unsubsidized Stafford loans—which are available to everyone—have carried a 6.8% interest rate for several years. ... The Senate plan also changes the rates for graduate students and parents who borrow from the government. Under the agreement, next year's rate for graduate Stafford loans will be 5.41%, and the rate for Plus loans—made to parents and graduate students—will be 6.41%. The Senate plan puts a cap on interest rates of 8.25% for undergraduate Stafford loans, 9.5% on graduate loans and 10.5% for Plus loans—higher than what students and parents have been paying. Those caps will kick in if the benchmark 10-year Treasury rate reaches about 6%. The move comes as the total student-debt bill approaches $1.2 trillion, including $1 trillion in federal student loans and an estimated $165 billion in private loans, the Consumer Financial Protection Bureau recently reported."

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