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New student loan bill passes House

By Christina Couch · Bankrate.com
Thursday, August 1, 2013
Posted: 4 pm ET

The heavily debated student loan reform, which passed the Senate last week, was approved by the House Wednesday in a 392-31 vote. The Bipartisan Student Loan Certainty Act of 2013 ties interest rates on new federal student loans to the rate of 10-year Treasury notes plus a markup of 2.05 percent for undergraduate federal Stafford loans, 3.6 percent for graduate loans and 4.6 percent for parent PLUS loans. To prevent interest rates from skyrocketing, all federal student loans would come with rate caps of 8.25 percent for undergraduate Stafford loans, 9.5 percent for graduate loans and 10.5 percent for parent PLUS loans, respectively.

The bill means savings for students taking loans out for next year as interest rates will now be nearly 3 percent lower than the former 6.8 percent rate and save about $1,500 over the life of a typical $6,922 undergraduate loan, according to White House estimates. Graduate students borrowing $25,666 will save about $2,900 over the life of their loan.

Jeff Lieberson, vice president of public affairs for the Association of Public and Land-grant Universities, a nonprofit research and advocacy organization that represents 218 public research universities, land-grant institutions, state university systems and related organizations, commended the bill for creating a permanent way to set student loan rates. Previously, federal student loan rates were reassessed and set by Congress every year or few years, leaving students uncertain of the cost of borrowing during their college tenure. Lieberson also said that the bill benefits students by reducing immediate loan costs in a way that doesn't cut into other student aid programs.

"The bill pays for itself. No other additional funding is needed, which eliminates the potential threat of cuts to other student aid programs," he says. "I think another appealing thing about this bill is that there have been some previous versions proposed ... where the loan would have been a variable rate that reset each year for the life of the loan depending on what the 10-year Treasury bond rate was, but this final bill locks in the rate ... for the life of the loan."

The bill also gained support in Congress because of the impact it will have on the deficit. According to Congressional Budget Office projections, the new legislation will save approximately $715 million over the next 10 years.

It's questionable how much the bipartisan act will save for students. In a July interview with Bankrate.com, Heather Jarvis, an attorney specializing in student loan education, criticized a similar measure for being "a better deal for students for a very short period of time" since interest rates under the bill are likely to rise beyond their former 6.8 percent rate within a few years. Organizations including the U.S. Public Interest Research Group, The Education Trust and the Institute for College Access and Success have also echoed reservations and chastised Congress for focusing exclusively on loan reform rather than the bigger picture of student debt.

Lieberson says that the bill "is not perfect" but it is a better alternative to leaving rates in flux and enduring more rounds of congressional debate.

"Our perspective has been, 'Sure, it would have been great if we could have found a way to have rates even lower than they are,' but given the political reality and the financial reality in Washington right now, this is really the best deal possible to be pragmatic and realistic about it," he says.

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