Posted Date: August 9, 2013
Jeff Baker, Director, Policy Liaison and Implementation, Federal Student Aid
Subject: Update on Direct Loan Interest Rates Effective July 1, 2013.
In a July 3, 2013 Electronic Announcement posted to IFAP, we provided the status of the then-scheduled statutory changes in Direct Loan interest rates. We explained that, under the law, the interest rate for Direct Subsidized Loans for undergraduate students, for which the first disbursement is made on or after July 1, 2013, would be 6.8% – an increase from the 3.4% rate that applied to such loans made prior to July 1, 2013. We noted that the Administration was working with Congress to reach agreement on a plan to address this increase.
This Electronic Announcement provides important information on Direct Loan interest rates now that 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). In addition to providing this information to the financial aid community, we are modifying our systems, counseling sessions, publications, and Web sites to reflect the interest rate changes.
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 (not just for Direct Subsided Loans made to undergraduate students). 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 for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans
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 student1 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, including the 3.4% and/or 6.8% Direct Subsidized and Direct Unsubsidized loans made prior to July 1, 2013.
The rates shown on the table attached to this Electronic Notice are less than what they would have been without these changes. And the new rate for Direct Subsidized Loans for undergraduate students is only 0.46% higher than the rate that applied to those loans prior to July 1, 2013.
Interest Rate for Direct Consolidation Loans
For Direct Consolidation Loans, the interest rate remains the weighted average of the interest rates on the loans included in the consolidation, rounded up to the next higher one-eighth of one percent. The only change made by the new law is the removal of the 8.25% cap.
Direct Unsubsidized Loans Converted from TEACH Grants
Under the requirements of the TEACH Grant Program, if a TEACH Grant is converted to a Direct Unsubsidized Loan, interest accrues back to the date when the TEACH Grant was first disbursed. Consistent with that statutory provision, the interest rate that will apply to a TEACH Grant that has been converted to a Direct Unsubsidized Loan will be the rate that was in effect for Direct Unsubsidized Loans on the date the TEACH Grant was first disbursed.
Federal Loan Servicer Preparation and Notification to Borrowers
Since the amended law specifically provides that the new interest rate determinations apply “retroactively” to July 1, 2013, Federal Student Aid has been working with our federal loan servicers to ensure that: (1) they are prepared to implement the new rates for new Direct Loans they receive from the Common Origination and Disbursement (COD) System; (2) they reset interest rates for all loans first disbursed on or after July 1, 2013 that they have already received for servicing; and (3) they notify all affected borrowers of the interest rate change. While this will be accomplished without any action on the part of schools or the students/borrowers, the Department’s Direct Loan servicers will send revised information to borrowers who had been provided interest rate information based on the law prior to enactment of the Bipartisan Student Loan Certainty Act of 2013.
Important Information About Direct Unsubsidized Loans for Graduate Students
As noted, the interest rate on Direct Unsubsidized Loans will differ depending on whether the student is an undergraduate student or a graduate/professional student. Therefore, special origination requirements will be necessary for any undergraduate student who received a loan that was first disbursed on or after July 1, who becomes a graduate/professional student during the loan period. In such instances, the institution must cancel any scheduled (or actual) disbursements that would have occurred when the student will be a graduate/professional student and adjust the loan’s loan period end date to coincide with the borrower’s undergraduate period of enrollment. The institution would then originate another Direct Unsubsidized Loan for the period when the student will be a graduate or professional student. In most instances, the academic year for both loans will be the same. Adjustments to loan period or academic year dates must comply with DCL GEN-13-13.
Because graduate/professional students are not eligible to receive Direct Subsidized Loans, the new graduate/professional Direct Unsubsidized Loan would include any Direct Subsidized Loan amount the student was originally scheduled to receive for the new loan period.
Table of Direct Loan Interest Rates 2013-2014
Attached to this Electronic Announcement is a table that displays the amounts used to determine 2013-2014 Direct Loan interest rates for loans first disbursed on or after July 1, 2013 and before July 1, 2014.
1 Since July 1, 2012, graduate and professional students are not eligible for a Direct Subsidized Loan.