Although things looked bleak for federal student loan borrowers a month ago, Congress has legislated away the doubling of the subsidized Stafford loan interest rate that went into effect on July 1st of this year. The rise from 3.4 percent to 6.8 percent for undergraduates would have increased interest paid on a 10-year repayment plan by about $3,800 for those who graduated in just four years. Instead, Congress put together a comprehensive scheme that does away with fixed interest rates entirely, and President Obama signed it into law on August 9. Here are seven things for borrowers to know.
(1) The changes are retroactive, so they reverse the loan rate doubling that went into effect July 1st.
(2) Thanks to the new law, the interest rate on subsidized and unsubsidized Stafford loans will be the yield on the 10-year Treasury note plus 2.05 percent as of June 1st of that year. Thus, for 2013, the rate will be 3.86 percent—much like the 3.4 percent of last year. If the 10-year Treasury rate holds (more on that below), borrowers of subsidized loans will pay only $4.10 more per month in interest on a 10-year plan than under the 3.4 percent rate, which comes to $493.16 in added interest over ten years.
(3) Because the rate-change applies to unsubsidized Stafford loans as well, student borrowers can expect a significant reduction in interest payments.
(4) For Parent PLUS loans and Grad PLUS loans, the rates will be 3.60 percent more than the 10-year Treasury note. Thus, parents who are helping their children going through school by taking on debt themselves and graduate and professional students will pay only 5.41 percent. Until now, the interest rate was a hefty 7.9 percent.
(5) One of the benefits of the new law is that in down times like these, students will get a better deal on their student loans than they were getting before. Moreover, the rates are fixed over the terms of the loans, so students can plan ahead each year and calculate how much they will owe after college.
(6) When interest rates start rising generally as the economy recovers, however, students will have to pay more. To prevent runaway interest rates, Congress capped the rate at 8.25 percent for subsidized and unsubsidized Stafford loans and 9.5 percent for Parent PLUS and Grad PLUS loans. The fear, though, is that students starting college this year will be enticed by the low rates, but in a few years they might be forced to either pay a high rate or quit school altogether.
(7) According to CNNMoney, the government intends to use the interest payments to cover the federal deficit.
There are good things and bad things about the student loan bill. Interest rates might snap upward sharply, but at least Stafford loan and Grad PLUS loan borrowers are eligible for hardship repayment programs like Income-Based Repayment (IBR). These programs come with their own problems, such as a large tax penalty when unpaid loans are canceled after twenty years, and Parent PLUS loans are ineligible for IBR.
If you are having trouble repaying a student loan, filing bankruptcy can help by discharging other debts, freeing up payments for the student loans.
For answers to more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
