Alexander: Senate Action On Student Loans Lowers Interest Rates For 200,000 Tennesseans Going To College This Fall

Wednesday, July 24, 2013

The Senate on Wednesday passed a bill sponsored by Senator Lamar Alexander (R-Tn.) that would lower student loan interest rates for 200,000 Tennesseans going to college this fall.

Rates on all new undergraduate loans taken out this year since July 1 will be 3.86 percent, cutting the current rate nearly in half.

Senator Alexander, the senior Republican on the U.S. Senate education committee and former secretary of education, said, "This permanent, market-based plan makes students’ loans cheaper, simpler and more certain. It ends the annual game of Congress playing politics with student loan interest rates at the expense of students planning their futures."

The Bipartisan Student Loan Certainty Act, sponsored by a bipartisan group of senators including Alexander and Joe Manchin (D-W.V.), Richard Burr (R-N.C.), Angus King (I-Me.), Tom Coburn (R-Ok.), Tom Carper (D-De.), Tom Harkin (D-Ia.), and Dick Durbin (D-Il.), will lower rates immediately for all students this year from the current rates of 6.8 and 7.9 percent and will tie rates on all new loans to the market.

Senator Alexander said, “This plan is fair to taxpayers and fair to students. It’s realistic because it’s market-based, which means it’s based on what it costs the government to borrow money. And the rates are fixed for the life of the loan, which provides certainty to students and parents.”

The Bipartisan Student Loan Certainty Act: 

  • Affects all new loans taken out after July 1 this year
  • Reduces interest rates on new loans for 11 million borrowers taking out 18 million loans totaling about $106 billion this year
  • Establishes for the first time a single rate on undergraduate loans, which are approximately two-thirds of all loans
  • Allows borrowers to benefit from the market’s current low interest rates and gives borrowers certainty by locking in rates for the life of the loan
  • Saves taxpayers $715 million over 10 years, according to the Congressional Budget Office
  • Protects students by limiting how high their interest rates can rise

The bill ties rates to the government’s 10-year borrowing cost, specifically the yield on the last auction before June of each year of the U.S. Treasury 10-year Note. This year, that yield is 1.81. The rates for undergraduate loans are the 10-year Note plus 2.05 percentage points—an addition to cover costs of defaults, collections, deferments, forgiveness, and delinquency. So, this year, all undergraduate rates would be 3.86. Undergraduate rates are also capped at 8.25, so students will never have to pay more than 8.25 percent interest on their loans.

The rates for graduate Stafford loans are the 10-year Note plus 3.6 percentage points. So, this year, those rates will be 5.41 percent. They are capped at 9.5 percent.

Rates on PLUS loans to parents and graduate students will be the 10-year Note plus 4.6 percentage points. This year, those rates will be 6.41 percent. They are capped at 10.5 percent.

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