Lower student loan rates on tap as bill heads to Obama - CNBC.com

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Lower student loan rates on tap as bill heads to Obama - CNBC.com Aug 1st 2013, 12:13 A bipartisan bill that would lower the costs of borrowing for millions of students is awaiting President Barack Obama's signature. The House on Wednesday gave final congressional approval to legislation that links student loan interest rates to the financial markets. The bill would offer lower rates for most students now but higher rates down the line if the economy improves as expected. For the moment, the focus was on the class of students signing loans for classes this fall. (Read more: House passes student-loan bill lowering rates—for now) "Going forward, the whims of Washington politicians won't dictate student loan interest rates, meaning more certainty and more opportunities for students to take advantage of lower rates," House Speaker John Boehner said. The measure passed 392-31. Undergraduates this fall would borrow at a 3.9 percent interest rate for subsidized and unsubsidized Stafford loans. Graduate students would have access to loans at 5.4 percent, and parents would borrow at 6.4 percent. The rates would be locked in for that year's loan, but each year's loan could be more expensive than the last. Rates would rise as the economy picks up and it becomes more expensive for the government to borrow money. But for now, interest payments for tuition, housing and books would be less expensive under the House-passed bill. (Read more: Student debt stalemate will hammer millions of undergrads) "Changing the status quo is never easy, and returning student loan interest rates to the market is a longstanding goal Republicans have been working toward for years," said Rep. John Kline, the Republican chairman of the House Committee on Education and the Workforce. "I applaud my colleagues on the other side of the aisle for finally recognizing this long-term, market-based proposal for what it is: a win for students and taxpayers." The House earlier this year passed legislation that is similar to what the Senate later passed. Both versions link interest rates to 10-year Treasury notes and remove Congress' annual role in determining rates. "Campaign promises and political posturing should not play a role in the setting of student loan interest rates," said Rep. Virginia Foxx, R-N.C. "Borrowers deserve better."

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Student loans -- public or private?

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Student loans -- public or private? May 19th 2013, 17:00 (MoneyWatch) Need to borrow to finance college? You've got plenty of company. Roughly two-thirds of students do. However, it's important to understand that there are two distinct student loan types: Federal loans, offered through the U.S. government, have dozens of protections that you don't get with private loans. Private loans are offered through lenders, such as banks, credit unions, and companies, such as Sallie Mae, as well as through schools. And, while private loans can still seem like a bargain because of their low "teaser" rates, they often cost thousands of dollars more over the life of the loan and leave borrowers with few options when it comes time to repay. How do the loans compare? Interest rates Federal loans The interest rate is fixed and is the same for every borrower. Private loans The interest rate "floats" based on an index rate, plus a "margin." So, for instance, if the rate was based on prime, plus 9 percentage points, it would currently be 3.25 (prime) plus 9 for a total rate of 12.25 percent. The margin, however, will vary from borrower to borrower based on the credit history of the borrower and, where applicable, the co-signer. Interest build-up Federal loans Students generally do not need to make payments on student debt while they are in school, are unemployed or in the 6-month "grace period" following graduation. With "subsidized" federal loans - the type given to students who are deemed to have sufficient financial need -- the government pays whatever interest accrues during those periods. That means the borrower's loan balance does not rise while they are in school. "Unsubsidized" federal loans accrue interest at a set fixed rate while the student is in school and the loan is in deferment. Thus, the loan balance at graduation is likely to be higher than it was originally. It is fairly simple for borrowers to know how much they will owe, by using a web calculator such as BankRate.com's Simple Savings calculator. If you were borrowing $5,000 at 6.8%, and figured the loan would be outstanding for four years while you were in school, for instance, you'd plug those numbers into the form and find that you'd owe $6,558 at graduation. Private loans Like unsubsidized federal loans, interest accrues on private loans from the day they are funded. However, because the interest rate is variable, it's impossible to know exactly how much you'll owe at graduation. To avoid graduation loan-shock, some lenders encourage or require borrowers to pay at least the amount of interest accruing while they are still in school. Borrower protections Federal loans All federal student loans come with terms that protect the borrower from economic devastation if they lose their job, go back to school or have some other economic hardship. For instance, repayment of federal student loans can be "deferred"  or placed on hold for up to three years, if you lose your job, join the Peace Corps or are called to military service. Repayment of federal loans is also deferred when you go back to school. During periods of deferment, interest will accrue on unsubsidized federal loans, but not subsidized federal loans. In addition, if you don't qualify for deferment, federal loans have additional check, called "forbearance," which can place repayment on hiatus because you are ill, or meet other requirements. Here's a handy guide to see if you qualify for student loan forbearance. Private loans Private loans don't necessarily allow borrowers to put their payments on hiatus for any reason. If you have a hardship, you can appeal to the lender for a deferment or forbearance. But whatever your reason, the lender may not agree. And if it does, it may levy a fee (in addition to accruing interest) to provide the deferment. Repayment options Federal loans Federal loans now offer seven different repayment options, including "standard" repayment, which pays off the debt in 10 years, and extremely flexible "pay as you earn" plans, that allow you to base your payments on how much you earn. (See "New and improved ways to pay student loans"). Private loans Typically provide two repayment options - standard and extended. You generally do not have the right to vary your payment based on your income. If you don't earn enough to repay the loan, you are likely to accrue additional penalties and interest. Discharge of debt Federal loans If you are disabled or go into public service or teach in some low-income areas, all or a portion of your federal loans can be forgiven or discharged - wiped away. The Department of Education has a long chart on the discharge options here. However, federal student loans are generally not dischargeable in bankruptcy. Private loans Private student loans are generally not dischargeable in bankruptcy and the federal programs that allow you to discharge the debt when you go into public service or social work do not apply to private student debt.

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Congress Votes to End Fixed Interest for Student Loans

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Congress Votes to End Fixed Interest for Student Loans Jul 31st 2013, 15:23 The U.S. Congress gave final approval to legislation that would peg the interest rates on government-sponsored student loans to a market-based rate, ensuring that almost 9 million undergraduates will pay 3.86 percent interest on their next loan. The Republican-run House voted 392-31 under streamlined procedures requiring a two-thirds supermajority -- to accept changes made by the Democratic-controlled Senate to legislation it initially passed in May. That clears the bill, H.R. 1911, for President Barack Obama, who backs the compromise. In his budget proposal this year, Obama called for linking interest rates on Stafford and PLUS loans to the government's borrowing costs. Enactment of the legislation will provide certainty to students who rely on government loans and to private lenders such as SLM Corp. (SLM), popularly known as Sallie Mae, and Wells Fargo & Co. (WFC) "Sallie and other private lenders can know where federal loan rates are going to be and therefore plan accordingly," said Michael Tarkan, who follows private lenders for Washington-based Compass Point Research and Trading. "The competition from the private side will go up against the federal PLUS Loan market." Borrowing Costs The new rates, pegged to the yield on the 10-year Treasury note, will be retroactive to July 1 -- the day that the interest rate for subsidized Stafford loans doubled from 3.4 percent to 6.8 percent, matching the rate for unsubsidized loans. The government pays the interest on subsidized loans while students are in school. Those loans are disbursed based on financial need, while unsubsidized loans have no income requirement. Students take out new loans for each academic year. Senate Democrats had resisted proposals by both House Republicans and Obama to tie rates to fluctuations in the 10-year Treasury yield. The legislative impasse prevented Congress from averting the previously scheduled July 1 doubling of the interest rate for about 7 million low-income students who take out subsidized Stafford loans. Republicans had highlighted the division between Obama and Senate Democrats, with House leaders repeatedly calling on the Senate to pass legislation meeting the president's requirement that interest rates reflect government borrowing costs. Bipartisan Breakthrough The breakthrough came on July 18, when a bipartisan group of eight senators agreed to a compromise that the Senate passed, 81-18, on July 24. Republican negotiators led by Tennessee Senator Lamar Alexander, a former U.S. education secretary, agreed to a demand by Democrats that rates for undergraduate loans be capped at 8.25 percent. Loans to about 1.5 million graduate students who take out Stafford loans will be capped at 9.5 percent. The rate cap for PLUS loans to more than 1 million graduate students and parents of undergraduates is 10.5 percent. Stafford loans limit the amount that can be borrowed, while PLUS loans have no restrictions. The Senate's approval of the bipartisan compromise was praised by House Speaker John Boehner, an Ohio Republican, who called the revised legislation "a victory for students and parents" that is "consistent with the House Republican bill passed in May." House Minority LeaderNancy Pelosi, a California Democrat, called the Senate vote "a concrete step toward restoring the economic security, educational opportunities, and peace of mind of America's students." Variable Rates A leading Democratic opponent of variable rates, Rhode Island Senator Jack Reed, argued during Senate debate that the legislation marked a "fundamental shift" in how Congress dealt with student loans. Under the bill, he said, students in college now will benefit from lower interest financed by higher borrowing costs for students who won't start college for four or five years. Variable rates pegged to the 91-day Treasury bill were used to determine subsidized Stafford loans when the direct student loan program began operation in 1992. A decade later, legislation was enacted to begin a four-year transition to a fixed rate of 6.8 percent for Stafford loans starting July 1, 2006. In 2007, Congress incrementally reduced the interest rate to 3.4 percent for subsidized Stafford loans. That rate was to expire on July 1, 2012, and jump to 6.8 percent. Responding to Obama's election-year call to keep borrowing costs low for financially needy students -- an appeal endorsed by Obama's Republican opponent in the presidential campaign, Mitt Romney -- Congress extended the 3.4 percent rate for another year. Pressure on Lawmakers The July 1 doubling of that rate meant that all Stafford loans, subsidized and unsubsidized, were set at a fixed rate of 6.8 percent. The increase put pressure on lawmakers to act before Congress begins its five-week summer recess at the end of this week so that students returning to college next month will not have to pay the higher rates. House Republicans today took credit for taking timely action and blamed Senate Democrats for the delay. "The House acted early, long before the deadline," Majority Whip Kevin McCarthy of California told reporters. "The Senate went through a lot of different movements," he said. Congress should "never have to go past that deadline." Under the legislation passed today, the interest rate for all undergraduate Stafford borrowers will be 2.05 percentage points higher than the yield on the 10-year Treasury note at the last auction before June 1. That yield was 1.81 percent at the May 15 auction, the last one the Treasury Department conducted before June 1. That puts the rate for undergraduate Stafford loans for the 2013-2014 academic year at 3.86 percent. Other Rates Graduate Stafford loans will be set at 3.6 percentage points more than the 10-year Treasury yield, or 5.41 percent for the coming school year. PLUS loans will be marked up 4.6 percentage points above the 10-year Treasury yield, for an interest rate of 6.41 percent in the coming year. Unlike the original House measure, students can lock in an interest rate each year that they borrow money. The House plan would have required students to pay a varying interest rate on the rolling total of what they borrow to finance higher education, with an 8.5 percent cap. "Like the 30-year mortgage, once you take out the loan, you know what your rate is going to be so you can plan on it," House Minority Whip Steny Hoyer, a Maryland Democrat, told reporters yesterday. He called measure "a compromise ''to the extent it reflects market rates'' sought by Republicans and Obama. To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net Enlarge image U.S. House Votes to Roll Back Doubled Student-Loan Interest Rate Manuel Balce Ceneta/AP Photo Rep. Cathy McMorris Rodgers, R-Wa., center, with Reps. Virginia Foxx, R-N.C., front left, Luke Messer, R-Ind., behind Foxx, and John Kline, R-Minn., left of McMorris Rodgers, talks about student loans on Capitol Hill in Washington, on July 31, 2013. Rep. Cathy McMorris Rodgers, R-Wa., center, with Reps. Virginia Foxx, R-N.C., front left, Luke Messer, R-Ind., behind Foxx, and John Kline, R-Minn., left of McMorris Rodgers, talks about student loans on Capitol Hill in Washington, on July 31, 2013. Photographer: Manuel Balce Ceneta/AP Photo 0:19 July 24 (Bloomberg) -- The U.S. Senate voted 81-18 today to replace fixed interest rates on federal loans with variable rates that will rise or fall annually according to the yield on 10-year Treasury notes. Senator Richard Blumenthal, a Democrat from Connecticut, reads the results of the vote. (Excerpt. Source: Bloomberg)

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