Congress has passed and President Obama has signed the Bipartisan Student Loan Certainty Act of 2013. The new law amends the Direct Loan interest rate section of the Higher Education Act of 1965, as amended (the HEA). Specifically, the new law amends section 455(b) of the HEA to provide new formulas for the determination of interest rates for all Direct Loan types. The new formulas apply to all Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans (made to parents and to graduate/professional students) for which the first disbursement is made on or after July 1, 2013. The new interest rate determination also applies to Direct Consolidation Loans for which the consolidation loan application was received by the Department on or after July 1, 2013.
Interest rates will be established each year for Direct Subsidized, Direct Unsubsidized, and Direct PLUS loans for which the first disbursement is on or after July 1 through the following June 30. The rate will be the sum of a uniform "index rate" plus an "add-on" that varies depending on the type of loan (Subsidized/Unsubsidized or PLUS) and the borrower's grade level (undergraduate or graduate/professional). Thus, interest rates will be the same for Direct Subsidized Loans and Direct Unsubsidized Loans taken out by an undergraduate student, with a different rate for Direct Unsubsidized Loans taken out by a graduate/professional student and for PLUS Loans taken out by parent borrowers or graduate/professional student borrowers.
Under the law, the index rate is determined each year as the "high yield of the 10-year Treasury note" auctioned at the final auction held prior to the June 1 preceding the July 1 of the year for which the rate will be effective, plus a statutorily defined "add-on." As noted, the add-on will differ depending on the type of loan and the student's grade level. Each loan type also has a maximum interest rate (or cap).
The interest rate for a loan, once established, will apply for the life of the loan—that is, the loan will be a fixed-rate loan. As a result, it is likely that many borrowers will have a set of fixed-rate loans, each with a different interest rate.
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