Obama Signs Student Loan Deal

Posted by Jason Van Steenwyk

Obama signs student loan dealPresident Obama has signed a broad student loan deal into law last week. The new law restores public subsidies of student loan interest rates, translating to lower costs of borrowing for those taking out federally-guaranteed loans for school.

The new law is expected to benefit about 11 million college students and former students. Some estimates peg the annual savings for the average borrower at $1,500 per year.

The federal government had been subsidizing borrowing costs on Stafford loans, which allowed students to borrow at a below-market rate of 3.4 percent. Student loan interest is also generally tax deductible, so the effective after-tax rate on student loan interest was even lower.

However, the subsidy expired as of July 1, which effectively doubled the rates borrowers had to pay out-of-pocket to 6.8 percent.

The new law restores the subsidy, and should allow students taking out new loans this year to borrow at 3.85 percent for undergraduates. Graduate students, on the other hand, will be able to borrow money at 5.4 percent, while parents of students can borrow at 6.4 percent.

These rates are tied to changes in Treasury rates, but also come with caps: The law provides that the most undergraduates can pay in student loan interest is 8.25 percent per year, while graduate students’ rates are capped at 9 percent. Parents’ rates are capped at 10.5 percent, regardless of what happens to Treasury rates, through the 2015 academic year.

Student loans are becoming an increasingly dicey problem, as total debt increases faster than the availability of jobs for newly-minted graduates and undergraduates to move into after leaving school that compensate enough to pay off the loans while still getting ahead. Total school debt now tops $1 trillion and is approaching $1.2 trillion, while new home purchases for first-time homebuyers have fallen by 29 percent over the last year, according to a recent data release by the National Association of Realtors. The combination of data suggest that student loans and a poor job market are combining to squeeze out other spending by the 22 to 35-year-old demographic.

That’s where your Post 9/11 GI Bill comes in handy, along with possible Tuition Assistance benefits, the Student Loan Repayment Program, and the VA Home Loan program. This combination of benefits can give veterans and servicemembers a leg up against other students when considering their education plans. This combination of benefits can blunt the costs of higher education, and make school a much better value for qualifying veterans than the general population.

The law expires in 2015 – making student loans a sure flashpoint in the 2016 election cycle, which includes a Presidential election. 

 

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