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Congress Reaches Deal To Lower Student Loan Rates

By Bryce Covert

"Congress Reaches Deal To Lower Student Loan Rates"

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CREDIT: Wall Street Journal

On Wednesday, Congress sent a bill to President Obama that lowers the interest rate on government subsidized student loans. The rates on those loans had risen from 3.4 percent to 6.8 percent on July 1 after Congress failed to pass a bill that would keep them low. Obama has already voiced his support for it.

Under the new bill, the rate for Stafford loans will be set at the rate for the 10-year Treasury note plus 2.05 percent, with a cap that means it won’t go above 8.25 percent. The rate will be locked in when a borrower takes out a loan, rather than fluctuating with the market as House Republicans had proposed. Undergraduates who take out loans for the next school year will see a 3.86 rate for federal Stafford loans, while graduate students will see 5.41 percent or 6.41 percent on PLUS loans.

Congress had lowered the rate for these loans to 6.8 percent to 3.4 percent in 2007, but it was a temporary fix.

After rates went up at the beginning of July, the higher cost was estimated to come to an additional $2,600 for the average borrower over a decade. This would have added to an already large burden. Outstanding student debt came to $986 billion in the first quarter of the year. Two out of five borrowers are likely to fall behind on their payments, and nearly 60 percent of all borrowers worry that they won’t be able to repay their loans. At many colleges across the country, students are more likely to default on their loans than to graduate.

The burden of student debt has ripple effects beyond individual students. As young people struggle to find full-time work that pays decent wages, they have to focus more of their money toward paying back loans than on buying other things. Their inability to purchase houses or cars puts a damper on those sectors, which hurts the overall recovery.

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