New Direct Loan Interest Rates - signed into law

Parents Forum
1

<p>I posted this in the Financial Aid Forum, but I know the subject has been raised on the forum, as well:
Last Friday, President Obama signed into law new interest rate legislation:
-Rates are now set based on the final auction of US Treasury Bills prior to each June 1. There is an add-on to the T-bill rate of 2.05% for undergrad subsidized and unsubsidized loans, 3.6% for grad unsubsidized loans, and 4.6% for Graduate PLUS and Parent PLUS loans.
-For 2013-2014, the interest rates are 3.86% for both subsidized and unsubsidized undergraduate loans, 5.41% for graduate unsubsidized loans, and 6.41% for Graduate PLUS and Parent PLUS loans. The rates were scheduled to be 6.8% for undergrad sub and undergrad/grad unsub and 7.9% for Grad PLUS and Parent PLUS loans.
-The interest rate will remain fixed for the life of the loan.
-Interest rates for each academic year will be announced in June of that year.
-Rates are "variable-fixed," meaning that students receive a new rate with each new academic year loan, but then that rate is fixed for the life of that loan.
-Interest rates are capped at 8.25% for undergraduate sub/unsub loans, 9.5% for graduate unsub loans, and 10.5% for Grad PLUS and Parent PLUS loans.
-For Direct Consolidation Loans, the interest rate remains the weighted average of the interest rates of the loans included in the consolidation, rounded up to the next higher one-eighth of one percent, without a cap.</p>

<p>ALL loans with an initial disbursement date on or after July 1, 2013 will have the new interest rates. Yes, this means that the law is retroactive. Direct Loans, not the school, is responsible for adjusting the interest rates on previously disbursed loans.</p>

2

<p>Tied to the 10Y treasury (10y rate evaluated annually + some spread, 205 bps) means less interest rate risk for the government. Arguably we should be tying it to the 30Y rate since most of these loans have a weighted average life of higher than 10Y</p>

<p>Students are still getting exceptionally cheap loans for a population with DLQ rates > 11% (meaning 11% interest minimum just to cover defaults + cost of funds means 15% interest rates would be at cost) but it still costs the federal government less money.</p>

<p>I feel as though this is a great compromise, though the availability of loans should continue to be further limited especially for graduate programs.</p>

3

<p>My personal feeling is that this will come back to haunt us as soon as interest rates begin to rise … and I certainly hope interest rates begin to rise soon, as this is the sign of a healthy economy. I believe that the public will only stomach a certain rise in the interest rates, with that rise being less than the cap. Meet y’all here in a few years to discuss the newest interest rate legislation. ;)</p>

4

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<p>It is the 10 year US Treasury rate isn’t it? Treasury bills are 3 month, 6 month, and maximum of 1 year maturity and currently yield from almost nothing to .11% for 1 year. 10 year US Treasuries are currently around 2.7%.</p>

5

<p>Yes it will tie to the 10-year Treasury note. See [Obama</a> signs student loan reform, ties interest rates to Treasury note - The Daily Californian](<a href=“http://www.dailycal.org/2013/08/10/obama-signs-student-loan-reform-ties-interest-rates-to-treasury-note/]Obama”>Obama signs student loan reform, ties interest rates to Treasury note)</p>

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<p>So what does this mean for students who haven’t taken loans yet this year (waiting to see what would happen)?</p>

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<p>^If the student borrows within this year 2013-2014,

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<p>Thanks. . . . . . .</p>