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BU Experts on What Student Loan Changes Mean to You

Generally good news, but it still can be confusing

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BU students received an email from BU Financial Assistance two weeks ago explaining changes to the interest rates on Stafford and PLUS loans. To expand upon that explanation, BU Today has assembled a primer, with help from BU experts, on the history and consequences of those changes.

What happened?

In May, the House of Representatives passed a student loan plan that would tie interest rates to market trends. Senate Democrats argued that new plan would not protect students and their families from financial market fluctuations. On July 1, with no agreement in place, the interest rate on subsidized federal Stafford loans doubled, rising from 3.4 percent to 6.8 percent. The Congressional Joint Economic Committee estimated the jump in the interest rate would cost students about $2,600 over 10 years.

Things changed again at the end of July when Congress approved legislation that set new rates for federal student loans. On August 9, President Obama signed the Bipartisan Student Loan Certainty Act of 2013 to restore lower interest rates for student loans by linking Federal Stafford and PLUS loans to the 10-year Treasury note.

What are the new interest rates?

The rate for undergraduate Stafford loans is 3.86 percent (both subsidized and unsubsidized). It is 5.41 percent for graduate Stafford loans, and 6.41 percent for undergraduate and graduate PLUS loans. These rates apply only to new loans with a first disbursement after June 30, 2013, and before July 1, 2014. Christine McGuire, associate vice president for enrollment and student affairs, says the new act applies to any new loan borrowed for this academic year.

Disbursement? What’s that?

It’s the money you get. According to the government’s Federal Student Aid website, it’s a portion of a federal student loan that the government pays out by applying the funds to the student’s school account. Students generally receive their federal student loans in more than one disbursement.

Will the interest rate affect loans I took out last year?

No, the interest rate for each new loan is fixed for the life of that loan.

Boston University BU, student loan financial aid changes, President Obama, Student Loan Certainty Act

Soon-to-be graduates might want to think about signing up for Smart Money 101, an educational money management program run by Financial Assistance that offers online tools, workshops, and seminars. Photo by Melody Komyerov

With the student loan interest rates tied to the 10-year Treasury note, it’s possible that the rates will increase as the economy improves. Is this good news or bad news for students and their future loans?

In the short term, the change means lower rates, McGuire says. But yes, as the economy improves, it will be more expensive for the government to borrow money, and that cost will be passed on to students. For the 2013–2014 year the 10-Year Treasury bill rate is 1.81 percent.

McGuire points out that caps in the Bipartisan Student Loan Certainty Act were put in place to protect borrowers if national rates skyrocket. The highest possible rate on an undergraduate Stafford Loan is 8.25 percent, 9.5 percent for a graduate Stafford Loan, and 10.5 percent for a PLUS Loan taken out by graduate students or parents.

I don’t like the sound of that. Can I just find a loan somewhere else, like a private lender?

Possibly, but private loans can be risky, because they have variable rates, says Julie Wickstrom, director of BU Financial Assistance. She says private loans also don’t have the same kind of protections as federal loans.

Wickstrom likes the benefits of federal loans, such as in-school deferment, income-based repayment, and in some cases, loan forgiveness. Her office encourages students to look at federal loans first.

“With the undergraduate federal loans, some students qualify for a subsidized loan, which means that regardless of what the rate is, the interest does not accrue while the student is in school because the government subsidizes that interest,” Wickstrom says. “That’s a really attractive benefit that private loans don’t offer.”

Wickstrom advises anyone considering a federal loan to contact Financial Assistance for more information on the new federal loan programs.

If I already applied for a 2013–2014 Stafford or PLUS loan, do I need to do anything now?

No, the new lower interest rate will be applied automatically to your 2013–2014 loan.

Will the government continue debating this topic?

While many are happy with the Bipartisan Student Loan Certainty Act, critics, among them US Senator Elizabeth Warren (D-Mass.), believe there is more to be done. “She doesn’t agree with the program,” McGuire says, “because in the end we still have a system where the federal budget profits from student loans, and she doesn’t think the government should be making money off of the backs of students.”

McGuire thinks Congress could consider a different solution as part of the reauthorization of the Higher Education Act, which is currently being written.

I’m still a little uncertain about some things. Where can I find help?

Students who are still puzzled should contact Financial Assistance if they have questions. They can also check out Smart Money 101, an educational money management program run by Financial Assistance that offers online tools, workshops, and seminars throughout the academic year.

“We try to give families the tools and information they need so they can make good choices,” Wickstrom says.

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Amy Laskowski

Amy Laskowski can be reached at amlaskow@bu.edu.

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