How the Student Loan Interest Rate Deal Affects Grad Students

US News

Congress is expected to enact legislation this week that will dictate student loan interest rates for years to come.

Subsidized Stafford loans, which are only available to undergraduate students, were the center of the rate debate. The interest rate on these loans doubled to 6.8 percent on July 1, but would fall to 3.4 percent for the upcoming school year under the pending legislation.

[Learn more about paying for graduate school.]

But undergrads will not be the only students affected by the proposed rate changes. Graduate students will see interest rates on their federal student loans shift, too.

The House passed a bill in May that called for market-based interest rates on federal student loans. The Senate passed a similar bill last week. Both pieces of legislation tie the interest on some student loans to the 10-year Treasury note, the federal government's cost to borrow money.

"Graduate students need to be aware that interest rates are not fixed," says Ting Pen, co-founder of ValuePenguin, a consumer finance website. "As the economy rebounds, the benchmark Treasury yield will rise, and with it, student loan interest rates."

The Senate bill adds 3.6 percent to the Treasury note for graduate students, setting a fixed rate for the life of the loan, and caps rates at 9.5 percent. The House is expected to consider the changes made by the Senate in the next few days and could send the final bill to the president's desk by the end of the week.

Still, Rep. John Kline, R-Minn., chairman of the House Education and the Workforce Committee, said the Senate's plan "reflects the policies and priorities" of the House.

"This is a victory for students and taxpayers," he said in a statement last week. "I look forward to the bill's swift passage in the House."

[Use these five strategies to pay for grad school.]

Interest rates on unsubsidized Stafford loans, which have held steady at 6.8 percent since 2006, would drop to 5.41 percent for the 2013-2014 school year if the House adopts changes made by the Senate last week. Unlike its subsidized counterpart, interest on these loans begins accruing immediately.

While the annual rate would be capped at 9.5 percent under the Senate's plan, experts predict it could exceed the existing rate of 6.8 percent by 2015. Each year's loan would be locked in at the rate it was issued, so graduate students could wind up managing multiple Stafford loans, each accruing interest at a different rate.

Graduate students can borrow a maximum of $20,500 in unsubsidized loans per year, but in many cases that doesn't even cover tuition and fees. That is where graduate PLUS loans come in.

Internships, rotations and general workloads can make it impossible for law students, medical students and others pursuing advanced degrees to work while they are in school. These students often pay for living expenses by taking out PLUS loans, which cover the difference between Stafford loans and their full financial need.

[Discover which MBA programs lead to the most debt.]

The interest rate on PLUS loans have been fixed at 7.9 percent since 2006, but would fall to 6.41 percent under the pending legislation. That lower rate would only be guaranteed for loans issued during the upcoming school year. In the future, students taking out a PLUS loan could see annual interest rates as high as 10.5 percent.

While current and incoming grad students will immediately benefit from the lower rates after the bill is signed into law, that relief does not extend to future classes, says financial aid expert Mark Kantrowitz, publisher of Edvisors.com.

"By the year 2020 the interest rates might be much higher," he says. "So current graduate students get a better deal while future graduate students may have a much worse deal."

Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.



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