President Obama signs a bill to keep students' interest rates low during a ceremony in the Oval Office on Friday. (Saul Loeb/AFP/Getty Images)
As college students prepare to return to class in a few weeks, President Obama on Friday signed into law a new way of setting interest rates for federal education loans. The rates will now move with the financial markets, which means lower rates for the coming school year.
This change is expected to benefit the millions of students and their parents who will use federal loans to pay for this academic year, saving them hundreds of dollars in interest over the lifetime of the loan. But as the economy improves in the coming years, as it is expected to, those interest rates will likely climb and could soon be higher than current rates, unless Congress again acts.
For the coming school year, the interest rate for undergraduates is 3.86 percent, and for graduate students it is 5.41 percent. The rate for PLUS loans, which are taken out by parents of students and graduate students, is 6.41 percent. These rates will lock in for the lifetime of the loan. All are lower than the original rates of 6.8 for undergraduates and graduates and 7.9 percent for PLUS loans.
The U.S. Department of Education will now change the interest rates and retroactively apply the new rates to loans taken out since July 1. The change is expected to only take a few days to implement.
Congress has imposed caps on how high these rates can go in future years: 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for PLUS loans. Although the rates are not expected to hit those caps in the next decade, congressional estimates show the rates could get close to the caps.
Obama was highly involved with the formation and passage of this legislation, even inviting a group of senators to his office last month for a chat. He has long advocated for interest rates that move with the market and reduce the cost of a college degree. Right now, interest rates on loans of all sorts are low — often much lower than the government’s set rates.
Earlier this year, the U.S. House proposed a plan that would have loosely followed White House guidance — but would have allowed rates to change year to year over the lifetime of the loan, instead of being locked in. That plan also would have allowed the government to earn more money from these loans, which could have been used to offset the federal deficit. Obama threatened to veto that legislation.
The Senate then struggled to reach a compromise that would not cost any more or less than the current system and appease Democrats and Republicans, along with the White House. Senate leaders tried again to bide more time to study the entire federal education loan system, but the White House pushed for a decision before lawmakers left town for a five-week summer break. Democratic leaders have already said they will likely revisit this issue in the coming years, especially if interest rates climb.
The Senate’s compromise passed in both chambers in late July with wide bipartisan support. Obama signed the legislation in an Oval Office ceremony Friday afternoon. It was one of his final things to do before leaving for vacation in Martha’s Vineyard.