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By Adam Zoll and Christine Benz | 08-09-2013 12:00 PM

Reform Brings Student Loan Relief, But Debt Still Weighs

Student-lending rates this fall will be lower than they were previously, thanks to a deal recently struck on Capitol Hill, but millions remain in default.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. After much debate, Congress has finally delivered a long-awaited deal on student loan rates. Joining me to discuss this and other news in the realm of college funding is Adam Zoll; he is assistant site editor for Morningstar.com.

Adam, thank you so much for being here.

Adam Zoll: Thanks for having me.

Benz: Adam, Congress passed a package that will tether federal student loan rates, to market rates. Let’s talk about the package that Congress enacted.

Zoll: After much debate on Capitol Hill about this issue, they finally struck an agreement which will tie student loan rates moving forward for federal loans to market rates, and what that means for people who are going to be enrolled this coming fall in college is that rather than paying 6.8% on student loans, which would’ve been the case under the former situation, rates for this coming fall will be 3.86% for undergrads. They'll be 5.4% for grad students and 6.4% for Parent PLUS loans. And what's going to happen moving forward is each year rates will reset based on prevailing market rates, actually tied to the 10-year Treasury note. And those will be fixed rates for the lifetime of the loan, but they will readjust each year, and a key point here is that there are caps on these rates. The rates will never be above 8.25% for undergrads, 9.50% for grad students, and 10.50% for the Parent PLUS loans. That's kind of a key provision.

This is definitely good near-term news for people who are going to be going to school in the fall or in the next few years. However, down on the road, there is definitely the potential that people will be paying rates higher than the 6.8% that had been this fixed rate over the past several years. There is definitely the potential for people to be paying more for loans in the long term than they had been previously.

Benz: One thing that is stunning is really just when you look at the rate of student loan repayment, it's not that good. We're seeing a lot of default rates. Let’s talk about what you see when you look at that data on student loan repayment?

Zoll: The Consumer Financial Protection Bureau recently did some research, and it estimates that there is close to $1.2 trillion worth of student debt out there, including about $1 trillion worth of federal student debt. And the number that really jumps out at you is that they estimate that there are more than 7 million student loan borrowers who are in default, and on average those who are in default owe about $14,000, at least among those who are in default in federal student loans.

The impact of being in default on a student loan is pretty severe. You could have your wages garnished, you may not get a tax refund, and obviously it can really wreak havoc on your credit score long term. The student debt crisis that many people have identified and have been talking about is very real for a lot of people. It reinforces the idea that you don’t want to over-borrow when you’re planning for college costs and more so that whatever you do borrow, you really want to make sure you are repaying that on a regular basis, so that you don’t go into default.

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