Is the new student loan bill a good deal?

In August, President Obama signed into law a bipartisan student loan bill. Without congressional action, interest rates on loans to college students were increasing from 3.4 percent to 6.8 percent. However, under the law signed by Obama, the interest rate for undergraduate loans will fall back to 3.86 percent. Graduate unsubsidized Stafford loans will be 5.41 percent  and Grad PLUS loans will be 6.41 percent. The 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 rates are determined as of June 1 each year and locked in for the life of the loan.

While the new bill reversed an interest rate hike on subsidized loans, experts are concerned about the long-term effect of the legislation.

On one hand, the new bill provides some stability in interest rates for subsidized loans. "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", stated Peter McPherson, president of the Association of Public Land-grant Universities.

On the other hand, as the economy improves, the interest rates will rise. This is because market-based interest rates are not static. The bill passed in August caps how high the 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 higher than where rates were in July 2013. Students could face those high rates in just a few years.

In the grand scheme, however, interest rates are not a factor in student's decision to borrow. Rather, their eligibility for the loans themselves is what factors into their decision. The ultimate effect of the current legislation does not address over-borrowing and the ominous student debt crisis.

Source: Kelsey Sheehy, New Student Loan Deal Good, and Bad, for Borrowers, U.S. NEWS (August 5, 2013) http://www.usnews.com/education/best-colleges/paying-for-college/articles/2013/08/05/new-student-loan-deal-good-and-bad-for-borrowers.