Obama signs student loan reform, ties interest rates to Treasury note

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President Barack Obama signed a bipartisan bill to reform the federal government’s student loan system Friday afternoon following the July 1 expiration of some loan subsidies and a resulting month-long legislative battle in Congress.

The law will fix student loan interest rates to the 10-year U.S. Treasury note instead of using the current arbitrary formula. It will also establish interest rate ceilings and lock interest rates for the loan’s lifetime. In the process, interest rates will be slashed for the upcoming 2013-14 academic year, with undergraduate rates reduced from 6.8 percent to 3.86 percent.

The law will also retroactively apply to loans taken out after July 1, when interest rates on federal Stafford loans doubled after Congress failed to prevent the expiration of subsidies. Stafford loan interest rates subsequently doubled from 3.4 percent to 6.8 percent. The legislation is projected to provide $25 billion in debt relief for students in the next five years.

During the past month, legislators from both parties have tried to address both short-term problems stemming from the expiration of the subsidies and long-term problems such as the national trend of increasing student debt and its effects on the economy.

Loans Infographic

The final bill passed focuses mainly on the short-term problem of interest rates, and some leaders of the U.S. House of Representatives have questioned the long-term effectiveness of this solution.

“The bill helps reduce costs to students and families, but it does not solve the long-term student debt crisis,” said bill proponent Rep. George Miller, D-Calif., in a press release.

UC officials and students also worry that loan debt may become unsustainable when economic conditions improve and Treasury bill rates start to increase.

“In the long term, accounting for inflation, loans will become more expensive for prospective Berkeley students,” said Rachelle Feldman, director of the UC Berkeley Financial Aid and Scholarships Office.

She suggested variable interest-rate loans and income-sensitive repayment programs as changes to the student aid program, as they would better adapt to changing economic conditions.

Alex Lee, a senior at UC Berkeley, has relied heavily on federal Stafford loans since he started college and will continue to do so. He said that he has no way of paying for college other than loans.

“I’m essentially at the mercy of the student loan system,” Lee said. “Once I get out, I’m pretty much screwed.”

Undergraduate loans for the coming year will drop to 3.86 percent, and graduate student rates will be 5.41 percent. PLUS loans, which are offered to graduate students and the parents of undergraduates, will drop to 6.41 percent. All of these rates will be lower than the current fixed rates of 6.8 percent for Stafford loans and 7.9 percent for PLUS loans.

The bill will also establish rate caps to prevent student loans from becoming too expensive — 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for PLUS loans.

Contact Dennis Vidal at [email protected].