Skin in The Game: Student Loan Rate Depends on When You Signed Up

NEW YORK (MainStreet)—As Congress tries to prevent a July 1 jump in interest on federal student loans from 3.4% to 6.8%, rate hike hysteria has spread from people who are about to borrow to those who have graduated and are on the job market—yet still have loans at rates above 3.4%. To them, the next freshman class could be about to catch a break. Their question: what about us?

Also see: Student Loan Bills Heading for a Congressional Vote, But Not Necessarily Passage

The unsatisfying answer is that the rate you signed for when you got the loan is the one you'll likely be stuck with until you've paid it off.

"Stafford Loan interest rates are fixed rates for the life of the loan that are specified in the Higher Education Act as amended by the U.S. Congress," said Department of Education spokesperson Jane Glickman.

Glickman provided the following breakdown of fixed interest rates as they are applied to Direct Subsidized and Unsubsidized Loans in the William D. Ford Direct Loan Program and to Federal Stafford Loans in the Federal Family Education Loan (FFEL) Program, since July 1, 2006.

 

  • July 1, 2006 – June 30, 2008: 6.80 %
  • July 1, 2008-June June 30, 2009: 6.00%
  • July 1, 2009-June 30, 2010: 5.60%
  • July 1, 2011-June 30, 2011: 4.5%
  • July 1, 2011-June 30, 2012: 3.4%
  • July 1, 2012-June 30, 2013: 3.4%

Also see: Student Loan Bill from Sen. Elizabeth Warren Gains Traction

Because of an amendment to the 2010 Affordable Care Act—the Obama health care legislation--no new loans were authorized to be made in the private lender-based FFEL Program after June 30, 2010.

Mark Kantrowitz, senior vice president and publisher of Edvisors Network, put a finer point on the interest rate environment. "The rates were set by statute, not pegged to any index," such as the prime rate or 10-year Treasuries. "These rates were set by a law enacted in February 2002 at 6.8% (Stafford) and 7.9% (PLUS), except that the Higher Education Reconciliation Act of 2006 modified the PLUS loan interest rate to 8.5% for the FFEL PLUS loan, accidentally leaving the Direct Loan PLUS at 7.9%." PLUS loans are used by graduate students and parents of undergraduates who signing for the loans.

"Then the College Cost Reduction and Access Act of 2007 did a phased-in rate reduction for subsidized Stafford loans to undergraduate students only," he said, "to fulfill the Democrats 'Six for '06' election year pledge to cut interest on student loans in half. This reduced the rates on new loans from 6.8% to 6.0%, then 5.6%, then 4.5% and finally 3.4%."

Also see: The Sequester and Student Loan Cuts: A Scorecard

"The rate reduction was scheduled to sunset on July 1, 2012, meaning that new loans after that date would be made once again with a fixed 6.8% interest rate," said Kantrowitz. "This was in the middle of an election year, so Congress extended the 3.4% rate to another year's worth of new loans. That expires June 30. If Congress doesn't act, new loans on July 1 will be at 6.8%."

"As to the federal consolidation loans, only the Direct Loan program may be consolidated as of July 1, 2010," he stated. "The formula is still the same – a fixed rate based on the weighted average of the interest rate on the loans that are consolidated, rounded up to the nearest 1/8 of a point and capped at 8.25%."

There are no credit checks or fees involved on federal loan consolidations, but there's a marginal cost to the borrower in rounding up the interest rate to the nearest 1/8th of a point.

Also see: Student Loan Twofer: Both Senate Rate Cap Bills Shot Down

Kantrowitz doesn't feel this is a viable option. "Since rates are now fixed, there's no real benefit from federal consolidation to the borrower other than streamlining repayment by replacing multiple loans with a single loan."

But even this limited flexibility might look good when compared to what borrowers face when trying to consolidate private loans, which introduces credit score volatility.

"Private consolidation loans, for refinancing private student loans often charge a fee," Kantrowitz said, "and involve a brand new rate, pegged to the current prevailing rates along with the borrower's -- and cosigner's -- credit score."

 

--Written by John Sandman for MainStreet

Also see: Obama's Déjà Vu Moment on Student Loans

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