Did you notice that the interest rate on your child’s Stafford student loan changed for the 2013 – 2014 school year? In fact, in the case of the unsubsidized undergraduate and graduate Stafford student loans, the rate actually went down!

On August 9, 2013 President Obama signed the Bipartisan Student Loan Certainty Act of 2013, changing how student loan interest rates are determined. The bill links student loan rates to the Federal 10-year Treasury rate, plus a small margin. The new rates are retroactive, effective for all loans disbursed on or after July 1, 2013. This affects all students who took out Stafford student loans for the 2013-2014 school year.

As the Mom of a sophomore in college, this is good news for me, since I try to pay the accrued interest annually on my daughter’s unsubsidized Stafford student loan in an effort to reduce her student loan balance upon graduation. Just to make sure the interest rate had in fact been applied, I logged onto our Nelnet account to confirm the new rate. As long as the T-bill rates stay low, I should see lower interest payments.

Although the interest rate on the unsubsidized Stafford student loan went down from 6.80% to 3.40%, which is great, it is not without a trade-off. Federal student loan interest rates are fixed for the life of the loan, however, the rates for new loans will fluctuate, based on the current market. The new Stafford student loan interest rates are in effect from 7/01/2013 to 6/30/2014. This means that there is the potential for higher interest rates and payments down the road, which may be devastating for newly employed graduates trying to establish a spending budget. Existing Federal student loan interest rates are still fixed for the life of the loan, so my other daughter, who graduated this year with $27,000 in Stafford student loans, doesn’t need to worry about the possibility of higher payments.

The interest rates for the current 2013-2014 academic year are as follows:

• 3.86% for undergraduate Stafford loans (both subsidized and unsubsidized)
• 5.41% for graduate Stafford loans (a decrease from 6.80%)
• 6.41% on all PLUS loans (a decrease from 7.9%)

The undergraduate subsidized rate actually increased from 3.4% to 3.86%, but the unsubsidized undergraduate and graduate interest rates both decreased from 6.80%.

The good news is the bill immediately lowers rates for most borrowers and it has no expiration date, so students will not have to wait for Congress to act to extend interest rate reductions as in the past. Parents and students who chose to pay the accrued interest on unsubsidized loans while the student is still in school, should take advantage of the lower interest rates to make those interest payments while rates are low.

The bad news is that market-based interest rates are not static. As the economy improves, they will rise and the experts predict that may happen quickly. The bill does cap how high the rates can go – 8.25% and 9.5% for subsidized and unsubsidized Stafford student loans respectively and 10.5% for all PLUS student loans for parents. Those caps are all higher than where the fixed rates stood prior to July, so depending on the level of debt, some students may be very affected by an increase in rates in a couple of years.

I did a quick calculation to see how the new rates and caps may affect my sophomore upon graduation. Assuming I paid all accrued interest and she graduated with a loan balance of $27,000 and the interest rate remained at 3.86%, her monthly payment would be $272. If the interest rate hit the cap of 9.5%, her payment would be $349. Although a difference of $77 does not seem insurmountable, it will have some impact on that student’s net available income.

The new student loan interest rate deal only fixes one thing – interest rates. It does nothing to address the larger issues plaguing higher education, namely ever rising tuition, over-borrowing and the mounting student debt crisis. Let’s hope Congress will address these issues some day soon.  Study hard kids and get that job!