Student Loans: The New Calculation

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President Obama is expected to sign new student loan legislation any day now. But what does it all mean?

The change enacts market-based interest rates for federal student loans, and lowers rates for borrowers immediately. The legislation will link interest rates on Stafford loans along with graduate and PLUS loans (Parent Loan for Undergraduate Students), to that of the 10-year Treasury note. Student rates are determined annually on June 1 and locked in for the life of the loan. It means that students who borrow this fall will pay 3.8 percent on subsidized loans, 5.4 percent on unsubsidized Stafford loans, and 6.4 percent on PLUS loans. The new law reverses the interest rate jump on subsidized loans, which jumped from 3.4 percent to 6.8 percent on July 1.

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Student loan repayment options

Under the new law, loan payments may be limited. Borrowers who choose the income-based repayment option will pay no more than 10 percent of their income above a basic allowance (the ceiling had previously been 15 percent). The basic living allowance is adjusted according to family size, and is set at 150 percent of the poverty line — currently $16,500 for a single individual and $33,000 for a family of four. Up to about 1 million borrowers are eligible for a reduction in their monthly payments.

According to the White House, the adjustment amounts to savings of $110 per month for a single borrower who earns $30,000 a year and owes $20,000 in college loans, based on 2009 figures.

Debt that remains after 20 years is forgiven. Public service workers (teachers, nurses, and those in military service) will see any remaining debt forgiven after 10 years.

All new loans will be direct loans delivered and collected by private companies under performance-based contracts with the Department of Education.

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Arguments for and against

So far, reviews of the changes are mixed. On the plus side, there is stability. Prior adjustments to student loan interest rates were unhelpful. Students found themselves in situations where they did not know until the 11 th hour what their interest rate was going to be. In the new bill, the rate is locked in and has no expiration date. Rates on federal college loans will not double and a long-term fix will be in place.

The new program provides one umbrella for all. In 2012, Congress extended the interest rate reduction only for subsidized Stafford loans which are made on the basis of financial need. The new market-based plan lowers rates for all federal loans. Anyone enrolled at least half-time in a degree-granting program is eligible for unsubsidized loans, and PLUS loans are available to parents, graduate students and those going for a professional degree. Eight out of 10 students who take out subsidized loans also borrow unsubsidized funds.

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On the negative side, market-based interest rates are inherently unstable. As the economy continues to improve, rates are bound to get higher. However, the new law puts a cap on how high rates can go: 8.25 percent for subsidized loans, 9.5 percent for unsubsidized Stafford loans and 10.5 percent for all PLUS loans. Students currently enrolled are safe from dramatic jumps in all likelihood but higher amounts will be a reality for future students.

As for the overview, the new bill mostly fixes interest rates and repayments. Issues concerning fast-rising tuition leading to staggering, overall student debt still urgently await attention.

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