Right now, students entering college are sifting through many options that could very well change their life forever. From college major to what university, from tuition rates to dorm costs, millions of families are crunching the numbers and determining how much they’re going to be spending over the next four to seven years.
A new law that came into effect this month will force those undergraduates entering college to pay significantly more for federal student loans than those who took out their student loans last year. Although the government says the new regulatory changes will reduce the cost of post-secondary education, the specifics of the law could mean the opposite if the 10-year Treasury rate rises.
Last year, Congress changed the law on interest rates for federal student loans that bases the rate off of the 10-year Treasury note as of the last auction in May and an extra small margin. This means the rate was 2.61 percent, eight-tenths of a percent up from a year ago.
Any federal student loan taken out on or following Jul. 1 will pay that interest rate for the entire life of the loan. Essentially, if a student takes out a $10,000 loan then it will cost close to $500 more than last year.
Here are the specifics:
Direct subsidized and unsubsidized Stafford loans for undergraduate students: 3.86 percent (Jul. 2013 to Jun. 30, 2014) | 4.66 percent (Jul. 1, 2014 to Jun. 30, 2015) | 8.25 percent (max rate for future loans)
Direct unsubsidized Stafford loans for graduate students: 5.41 percent (Jul. 2013 to Jun. 30, 2014) | 6.21 percent Jul. 1, 2014 to Jun. 30, 2015) | 9.5 percent (max rate for future loans)
Direct graduate PLUS loans: 6.41 percent (Jul. 2013 to Jun. 30, 2014) | 7.21 percent (Jul. 1, 2014 to Jun. 30, 2015) | 10.5 percent (max rate for future loans)
Direct parent PLUS loans: 6.41 percent (Jul. 2013 to Jun. 30, 2014) | 7.21 percent (Jul. 1, 2014 to Jun. 30, 2015) | 10.5 percent (max rate for future loans)
There are other new rules that haven’t been as widely as reported as the interest rate changes.
If a student is enrolled within 120 days of a school shutting its doors and is unable to complete their credentials then the student is eligible to be discharged from the federal student loans. The entire school needs to close to be eligible.
President Obama used executive action to expand the Pay As You Earn initiative to borrowers with both older and new loans. Borrowers who take out a loan on or after Jul. 1 will be able to take part in the income-based repayment plan and caps their payments at no more than 10 percent (before it was 15 percent) and will forgive the remaining balance after 20 years (before it was 25 years).
Finally, there will be new standards for students who have defaulted on their loans: consolidation and rehabilitation. These will be applied to all borrowers, even if the name of the loan is under someone else’s.
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