Last week, Senator Nelson announced that he plans to file legislation that would help battle the recent interest rate hikes for federal student loans. His bill would cap interest rates for undergraduates at 4%, which currently sits at 8.25%. This piece of legislation would also allow students to refinance their loans if their rates are currently above 4%. Refinancing is currently not allowed, which Nelson does not agree with. He said, “if you can get a home loan at 4 percent, why can’t students get an education for the same rate?”
Currently, the rates are set by Congress each year and go into effect on July 1. The rates for undergraduates rose to 4.45%, unsubsidized graduate loans rose to 6%, and PLUS loans for parents of undergraduate students rose to 7%. The recent auction of 10-year Treasury notes caused this hike in interest rates.
Since these notes were high yield, signaling less investment in treasuries due to an increase in the confidence of the economy, the interest rates went up. Congress uses a formula to determine these rates. According to the article “Sen. Nelson wants to cap student loan rates at 4 percent, allow refinancing,” the math for getting the 4.45% is as follows: “For undergraduates, the formula would be 2.40 percent plus the fixed margin of 2.05 percent, equaling 4.45 percent as the new interest rate.”
Senator Nelson also wants to cap graduate loan interest rates at 5% and PLUS loans at 6%. On top of these interest rate changes, he wants to eliminate the processing fees for federal student loans. The processing fee currently sits at 1.069% for new unsubsidized and unsubsidized loans. For PLUS loans, it is at 4.276%. After October 1 of this year, these fees will change to 1.066% and 4.264% and will be in effect until October 1 of 2018.
Yesterday, Senator Nelson introduced the Student Loan Relief Act on the Senate Floor. He stated that “you may be surprised to know that the second most amount of debt in America next to mortgage debt — home mortgage debt, the second largest to mortgage debt is student loan debt. $1.3 trillion more than all the credit card debt combined in America, student loan debt is higher than that — $1.3 trillion.” To watch his speech, follow the link. You can also view a full copy of the legislation here.