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Will a Student Loan Deal Pass This Week?

The U.S. Senate is poised to vote this week on a bill that would stabilize student loan rates by tying them to market rates.

The proposed legislation was announced last week, and in light of the increasing student loans rates facing students in the fall, it is likely to pass with President Obama's support, reports USA Today.

What is included in this new student loan deal, and how will it affect students and their families?

Loans Fixed to Market Rates

On July 1, the interest rates for millions of federal student loans doubled from 3.4 percent to 6.8 percent after Congress failed to agree on what to do about loan rates. The new student loan deal, if approved, would lower the rates retroactively, before students end up paying thousands more for college, reports Reuters.

Democrats and Republicans have worked together to tie student loan interest rates to the interest rates of 10-year treasury notes.

These notes, like treasury bonds, have a fixed interest rate that changes with the market. Under the plan, federal student loan programs would use these rates as a base for charging students interest on their loans.

Different Rates for College, Graduate School

Although the job market increasingly seems to be pushing more students to pursue graduate school, the new plan seeks to give undergraduate students a lower rate.

The new deal would retroactively set undergraduate student loan rates for 2013 at 3.86 percent instead of 6.8 percent, reports The New York Times.

If the Senate passes this bill, student loans will also have a new interest rate cap, different for each type of loan, reports USA Today. Those caps would be set at:

  • 8.25 percent for undergraduate loans,
  • 9.5 percent for graduate loans, and
  • 10.5 percent for GRAD plus loans.

Critics at Bloomberg point out that many of these caps are the same as they were before, but the amount of financial wiggle room between the base market amount and the cap has been decreased.

What Does This Mean for Students?

In the short term, undergraduate students who are continuing their education will be granted a brief reprieve from the higher 6.8 percent interest rate if the new deal passes, but a slightly higher interest rate in the long term, reports Bloomberg.

The new bill does not propose to remove federal options like unemployment deferral and forbearance options, and students can still reduce payments using an Income Based Repayment (IBR) plan.

However, this change in student loans will be fairly permanent if it succeeds. As Senate Majority Leader Harry Reid explained, "[i]f we do this... [w]e won't be back two years from now, it will be done," reports USA Today.

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