Student loan rates would be pegged to markets

AP News
Posted: Jul 18, 2013 12:03 PM

WASHINGTON (AP) — A bipartisan deal in the Senate has emerged that would lower interest rates on student loans in the next few years but could spell higher costs after that.

Interest rates on new subsidized Stafford student loans jumped from 3.4 percent to 6.8 percent on July 1. Lawmakers from both parties objected and set in motion an overhaul of the whole system that links interest rates to the financial markets.

Here is a look at the direct-lending system students could face this fall under the Senate compromise:

—All undergraduates would borrow at a rate of 3.85 percent this fall. As the economy improves, rates would climb but could not top 8.25 percent. Students previously borrowed at 3.4 percent or 6.8 percent based on their financial need.

—Most graduate students would have access to loans at 5.4 percent, but rates could not climb above 9.5 percent. Qualifying graduate students previously borrowed at 6.8 percent.

—Loans that parents sign to help their children would come at a 6.4 percent interest rate. The rate would be capped at 10.5 percent. Some graduate students could choose these loans as well.

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—Student borrowing limits are based on how much they and their parents could be expected to contribute to college costs, in addition to the costs of attending the school.

—Other popular financial aid options such as work-study programs, Pell grants and Perkins loans are not part of the deal and would continue as before.

—Students' previous borrowing does not change under the deal. Those already repaying loans would not be affected. Only new loans taken out this fall would be covered under the deal.