New Student Loan Deal – Is it Good or Bad for Borrowers?

President Barack Obama is expected to sign new student loan legislation this week, making market-based interest rates the law of the land for federal student loans and immediately lowering rates for borrowers.

The bipartisan bill ties interest rates on Stafford loans, as well as graduate and Parent Direct PLUS loans, to that of the 10-year Treasury note, which reflects the federal government’s cost to borrow. The student loan rates are determined as of June 1 each year and locked in for the life of the loan. That means students borrowing this fall will pay 3.86 percent on all undergraduate Stafford loans, 5.41 percent on unsubsidized Stafford loans for graduate students and 6.41 percent on all PLUS loans.

[Find out what the new interest rates mean for grad students.]

While the compromise reversed the interest rate hike on subsidized loans, which jumped from 3.4 to 6.8 percent on July 1, experts say the deal is a mixed bag for students. Here is a rundown of the benefits and drawbacks of the new student loan legislation.

 The Good

• Stability: Prior tweaks to student loan interest rates were temporary and agreements to extend or reauthorize the adjustments often led to political showdowns.

“The past couple of years we’ve been in these situations where students haven’t known up until the last minute what their interest rate was going to be, because we were waiting for Congress to act,” says Megan McClean, director of policy and federal relations at the National Association of Student Financial Aid Administrators.

[Learn what to ask during student loan counseling.]

This bill has no expiration date, so students can breathe a sigh of relief, Peter McPherson, president of the Association of Public Land-grant Universities, said in a statement last week.

“Interest rates on subsidized federal loans for college won’t double from last year and a long-term fix will be in place to avoid these annual political chess matches over the loan program,” he said.

• Universal: Last year Congress extended an interest rate reduction, but only for subsidized Stafford loans, which are issued to students with financial need. The new market-based plan lowers rates for all federal loans, which stood at 6.8 percent for unsubsidized Stafford loans and 7.9 percent for PLUS loans. Any student enrolled at least half-time in a degree-granting program is eligible for unsubsidized loans, and PLUS loans are available to parents, graduate students and those pursuing a professional degree.

“This is a deal that benefits all borrowers,” says McClean, who points out that 80 percent of students who take out subsidized loans also borrow unsubsidized funds.

The Bad

• Fluctuation: Market-based interest rates are not static. As the economy improves, they will rise, and experts predict that will happen quickly.

The deal passed last week does cap how high those rates can go – 8.25 percent and 9.5 percent for subsidized and unsubsidized Stafford loans, respectively, and 10.5 percent for all PLUS loans. Those caps are all higher than where the rates stood just a month ago, and could be a reality for students in just a few years’ time.

“I’m glad that students today won’t be borrowing at 6.8 percent, but I think in two or three years we’re going to be wondering ‘Why are we giving kids these expensive loans?'” says Robert Weinerman, senior director of college finance at College Coach, an educational advising firm. Reed more …..