Lawmakers Reach Tentative Deal on Student Loan Rates
by Terri Eyden on
By Jason Bramwell
A little more than two weeks after the interest rates on federal subsidized Stafford student loans jumped from 3.4 percent to 6.8 percent, a tri-partisan group of senators reached a compromise to lower interest rates for borrowers who have taken out or will take out federal student loans after July 1, 2013.
The proposal, known as the Bipartisan Student Loan Certainty Act, which was introduced on July 17 by US Senators Joe Manchin (D-WV), Richard Burr (R-NC), Angus King (I-ME), Tom Coburn (R-OK), Tom Carper (D-DE), Tom Harkin (D-IA), Lamar Alexander (R-TN), and Dick Durbin (D-IL), requires that for each academic year, all newly issued student loans be set to the US Treasury ten-year borrowing rate plus add-ons to offset costs associated with defaults, collections, deferments, forgiveness, and delinquency.
"This compromise is a win-win for both students and taxpayers," Coburn said in a written statement. "Tying interest rates to the market allows students to take advantage of historically low rates while ensuring taxpayers will not have to foot the bill for arbitrary rates set by Congress."
For the coming fall semester, the proposal would retroactively move the loans to a market-based rate that would be 3.86 percent for subsidized and unsubsidized Stafford loans for undergraduate students and 5.41 percent for graduate students, according to lawmakers. Stafford loans are fixed-rate student loans for undergraduate and graduate students attending college at least half or part time.
The interest rates for PLUS loans, federal loans that graduate students or parents of dependent undergraduate students can use to help pay education expenses, would be 6.41 percent.
On top of the Treasury note, undergraduates would pay an additional 2.05 percent and be capped at 8.25 percent, graduates would pay an additional 3.6 percent with a cap of 9.5 percent, and parents of dependent undergraduates would pay an additional 4.6 percent with a cap of 10.5 percent, according to Charles Schultz, a partner with the Washington National Tax practice of McGladrey LLP.
The Senate still has to approve the Bipartisan Student Loan Certainty Act before the new loan interest rates go into effect.
Interest rates for subsidized Stafford student loans doubled from 3.4 percent to 6.8 percent on July 1 after a temporary fix from Congress expired June 30.
Schultz told AccountingWEB there is some concern about the new deal among his clients who have college-aged children, because the expected adjustable rate for the subsidized Stafford loans would be higher than anticipated.
"It also has a fairly high cap that we all hoped wouldn't be hit," he said.
Another concern, according to Schultz, is that the third-party loan market becomes even more competitive, particularly if students and parents can negotiate a much lower interest rate than what lawmakers have proposed. Unlike with subsidized Stafford loans, private student loans are managed through private lenders, issued in the student's name, and require a cosigner.
"If the parent is willing to take the risk, cosigning the [private student loan] may be worthwhile," he said.
With this compromise by lawmakers, evaluating the cost of tuition becomes even more important, Schultz said, with in-state schools potentially providing the greatest value. For subsidized student loans, the school determines the amount a student can borrow, which may not exceed his or her financial need.
"For lower- to middle-income people, they need to evaluate schools and do the due diligence on the cost of tuition," he added. "The average loan per student is up to approximately $27,000. There are certainly students who may be leaning toward private education or an out-of-state school. But let's say an in-state school is offering predominately what you're looking for as a student, and you can enjoy the benefits associated with being a resident student. I think there has to be a sobering approach to planning for the student's education. There are certain in-state schools that will offer the subsidized student loan program and other opportunities that you would otherwise be searching for if you were leaning toward an out-of-state school."
Additional Student Loan Tips for Clients
Mira Finé, national director of tax operations for Denver-based Hein & Associates LLP, provided the following six tips that accountants and advisors should be providing their clients on student loans.
- If there's equity in the home, consider refinancing the home at rates that are lower than the student loan interest rates.
- Consider if there are any grants or other programs that could reduce the amount of student loans incurred while a child is going to college.
- Revisit 529 plans to pre-fund a portion of college education costs.
- At the current prime rate of 3.25 percent, and even potentially capping at 8.25 percent, undergraduate students are getting a good deal because they're risky borrowers. Because they're risky borrowers, no bank would ever lend at the low rates the government is proposing.
- The interest rate applies to new loans, not existing loans. Always consider paying the principal portion of the loans quicker to reduce the interest rate burden.
- Student borrowers aren't required to pay more than 10 percent of their disposable income in debt service. Also, the government will forgive the remaining loan balance after twenty years for qualifying individual borrowers. However, there may be certain limitations as to the amount of the payments and forgiveness of the debt.
Three Advantages of Stafford Loans
Schultz said accountants and financial advisors should inform their clients of three key benefits of subsidized Stafford student loans:
1. The federal government will pay the interest on the loan: The US Department of Education pays the interest on a direct subsidized loan for a student who is attending classes at least half or part time; for the first six months a student leaves school (referred to as a grace period); and during a period of deferment (a postponement of loan payments).
"Obviously, this can be very beneficial," Schultz said. "If you have an outside third-party note or loan, that's not happening."
2. Deferral payment options are available. Whether it's subsidized or unsubsidized, there are potential repayment options available for students who have Stafford loans that aren't available to borrowers of private loans.
"For example, if a student loses his or her job, the student can automatically qualify for a deferral of loan payments for up to three years," he said. "This may be indispensable because, let's face it, a private lender is not going to give you that."
3. Payments may be based on percentage of wage versus fixed value. Schultz said another provision available to students with Stafford loans is an income-based repayment program, which is designed to help students reduce monthly loan payments to make their loan debt manageable.
"It's a payment based on a percentage of the salary earned by the student rather than the fixed payment," he stated. "The thinking here is the Stafford loans at least recognize who the debtor is: the students, with their lives ahead of them and a wide range of things - good or bad - that could happen to them. At least there's more nimbleness associated with Stafford loans that you wouldn't typically see with other third-party loans."
AccountingWEB Readers – Join the Discussion:
- Do you believe that tying interest rates to the market is the right solution for student loans? Why or why not?
- What other advice would you give clients who have college-aged students on financing options or how best to pay back loans?
Please share your thoughts in the comments section below.
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