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Student loan legislation may help colleges explain aid

Interest rates will be in line with market
University Business, September 2013

There’s been much buzz about what the new student loan legislation means for students. It lowered interest rates and made borrowing more affordable in the short term, but how will it affect colleges and universities?

Signed into law by President Obama on Aug. 9 after a summer of negotiations, the bill allows undergraduates to borrow at a 3.9 percent rate for subsidized and unsubsidized federal loans.

After the previous extension of the 3.4 percent interest rate expired this summer, it was temporarily raised to 6.8 percent. Graduate students can borrow at 5.4 percent, and parents at 6.4 percent. Unlike previous fixed interest rates, the law ties interest rates to financial markets, so they will increase as the economy improves, capping at 8.25 percent for undergraduates.

Justin Draeger, president and CEO of the National Association for Student Financial Aid Administrators, says a major benefit for institutions is that they no longer need to explain to students why federal student loan interest is out of step with market rates. “Generally speaking, federal student loans are a safer option, but trying to explain those benefits at a time when they could get a private loan for 6 percent versus 8 percent has been very difficult,” he says. Financial aid offices will benefit from the certainty and predictability of a more stable system, says Jon Fansmith, associate director of government relations at the American Council on Education.

“Campuses are also pleased to end the recent pattern of legislative battles over interest rates, often accompanied by cuts to aid programs,” he says. “There is legitimate concern about the possibility of high rates in the long term, but there is an expectation that this bill buys time at lower rates for Congress to comprehensively examine student loans and the aid programs.”

The new legislation means interest rates will increase only slightly above previous levels, and much less than otherwise might have occurred, says Alan Kadish, president and CEO of the New York-based Touro College and University System. But it could harm enrollment numbers. “Despite the caps, the longer-term provisions that allow for market rate increases are concerning in that they may inhibit enrollment,” he says.

But there’s no data that shows interest rates in and of themselves increase or decrease college access, says Draeger. Interest rates certainly have an impact on the cost students pay for college, but, he says, the availability of funding can impact access and choice more than interest rates could.