Congress has approved a bill that ties interest rates on federal student loans to the financial market. Some background: when the direct student loan program began in 1992, 91-day Treasury bills determined subsidized Stafford loan rates.
In 2002, a four-year transition began to a fixed rate of 6.8 percent for Stafford loans, which started in July 2006.
In 2007, Congress cut the interest in steps to 3.4 percent for subsidized Stafford loans. That rate was to end on July 1, 2012 and jump to 6.8 percent, but Congress extended the lower rate for another year. However, when that rate doubled July 1 of this year, it put all Stafford loans at a fixed cost of 6.8 percent.
The current bill, approved on July 31, reversed the rate increase that took effect July 1. Interest rates for the fall will be 3.9 percent for undergraduates, 5.4 percent for graduate students and 6.4 percent for parents. If the economy improves, rates would increase but are capped at 8.25 for undergraduates, 9.5 for graduate students and 10.5 for parents. The new rates will be retroactive to July 1, 2013.
The measure that passed fixes each year’s loan, letting students lock in their costs.