Wednesday, June 5, 2013

The House Passes Student Loan Bill

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On May 23, 2013, the U.S. House of Representatives passed H.R. 1911, the Smarter Solutions for Students Act (sponsored by Rep. Kline) in order to prevent the present interest rates on certain federal loans from doubling in July.

What H.R. 1911 intends:  

  • Generally: to tie the interest rates to the market, removing the government from determining the rates.
  • Direct subsidized and Direct unsubsidized Federal Stafford Loans will match the rate of a high-yield ten-year Treasury note plus 2.5% and the rate would be capped at 8.5%.
  • PLUS loans will match the rate of a high-yield ten-year Treasury note plus 4.5% and capped at 10.5%.
  • These rates only apply to loans first disbursed on or after July 1, 2013.
  • Applications for Government Consolidation Loans on or after July 1, 2013, will take the weighted average of the interest rates for the loans consolidated, rounded to the nearest one-eighth of 1%.

What this means for you:

  •  Pros:  If passed before July, the interest rate will not double and will still be less than if it were to double.  Your rates will go from fixed rates (meaning they never change) to variable rates (meaning the rates fluctuate) – by having variable rates, if the market dips, then you have an opportunity to pay less interest than you may have had to pay with a fixed rate.
  • Cons:  Your rates will go from fixed rates to variable rates – this can also be a con because if the market improves you may pay more than what you agreed to pay when you signed for the loan.  The payments could be more than what you budgeted for or what your income can handle.

A White House Veto:  Currently, President Obama is threatening to veto the bill (kill it) if it passes the Senate and reaches his desk.  The plan he would like to have enacted would also have the rates tied to the market, matching the high-yield ten-year Treasury note.  The difference is that he would make the rates fixed instead of varied, which means whatever the treasury note happens to be at the time of signing your loan agreement will be the rate at which you pay for the life of that loan.  Additionally, he also plans to cap student-borrowing costs at 10% of the student’s income; meaning monthly payments made on the loan would not be more than 10% of the borrower’s income.

The issue of student loans has become a hot-button topic on The Hill not only because of the pressing July deadline, but also because of a recently released report stating that the government has profited a record $51billion from student-borrowers under the Obama Administration.  Both sides of the aisle believe that the government shouldn’t be profiting off of students who are presently struggling with finances and who are the future of a (hopefully) stronger economy.

All students – pre-law and law – should be keeping a close eye on this issue as it will affect your future debt obligations and ability to sustain your livelihood.  Check back for updates on this issue.

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