What You Need to Know About the New Student Loan Law

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This post comes from Christine DiGangi at partner site Credit.com.

Regardless of their majors, students may want to brush up on Economics 101.

That’s because President Barack Obama signed H.R. 1911: Bipartisan Student Loan Certainty Act of 2013 — the student loan bill — into law last week. It ties government-backed student loan interest rates to the 10-year Treasury note, meaning the country’s economic health impacts borrowing rates.

The law affects new loans, and for students borrowing this year, it is good news. The government-backed loans — Stafford loans — carry a 3.9 percent interest rate for undergraduates, as opposed to the 6.8 percent rate students faced before Obama signed the bill. The rate is 5.4 percent for graduate students.

Interest rates on the 10-year Treasury note fell during recession recovery. Though the rate is up about 1 percentage point from this time last year, it remains roughly 2 percentage points below pre-recession interest rates, according to the Treasury Department.

“If you look at past economic downturns, they tend to follow a typical pattern,” said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a resource for planning and paying for college.

“During the economic recovery, interest rates increase by about the same amount that interest rates decreased at the start of the economic downturn, but they take twice as long to do so,” Kantrowitz said.

So students taking out loans in the next few years are getting a good deal. Their younger siblings? Probably not.

“It’s sort of like a teaser rate,” said Mitchell D. Weiss, a professor of finance at the University of Hartford, and a Credit.com contributor. “What they did was give them the benefit of this lower rate right now, but this interest rate can go pretty high.”

Going forward, the undergraduate Stafford loan interest rate will fall somewhere at or below 8.25 percent, the cap set by Congress. (Graduate student loans have a 9.5 percent cap.) The rate will vary each year, as determined by the yield of the 10-year Treasury note, plus 2.05 percent, which covers administrative costs of servicing the loan. The interest rate at which students borrow remains fixed throughout the life of the loan.

What student borrowers should look out for

Students are looking at four years of loans with four different interest rates. Keeping up with market fluctuations can help borrowers know what to expect when it’s time to take out a loan, but preparing for loan repayment takes more than checking the markets on Bloomberg.

“Students should not be afraid to borrow at a reasonable level,” said Megan Davis, associate director of financial aid at the University of Washington. She said the loans will remain a good tool for degree-seekers, but no one should borrow more than they need to.

That means student debt at graduation should be less than the graduate’s annual income, Kantrowitz said.

A little Internet research will show students the sort of salary they can anticipate for their chosen career paths — something to consider when weighing program costs.

Davis, Kantrowitz and Weiss rattled off several ways to minimize student debt, mainly by setting realistic expectations for repayment.

  • Choose a cheaper school. “If you’re going into one of these fields that doesn’t pay as well, make sure that you borrow less,” Kantrowitz said. “Maybe you don’t go to the most prestigious school for your field of study, but you still get a very high quality education.”
  • Stay on top of your debt. A student shouldn’t learn about his or her debt load during exit counseling, weeks before graduation. “It’s always surprising to me that people don’t know how much they borrowed,” Davis said. “Remain aware that there are protections and options for students to meet repayments.” Visiting the Department of Education’s financial aid website and understanding the structure of student loans can make the post-grad transition less jolting.
  • Don’t make your parents foot the bill. It’s more expensive. Under the new law, Direct PLUS loans carry a 6.4 percent interest rate this year, to be capped at 10.5 percent.
  • Avoid private lenders. Even if the interest rates are lower, private lenders tend to provide fewer options for repayment.“If you run into trouble, you can’t restructure these loans as easily as you can with the government,” Weiss said.
  • Use your time efficiently. If your college charges a flat semester rate, Weiss recommends that students load up on credits. Or get a job to help pay for school.

“Reduce the amount you need to borrow,” Kantrowitz said. “Live like a student while you’re in school so you don’t have to live like a student after you graduate.”

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