On August 9, President Obama signed the Bipartisan Student Loan Certainty Act of 2013, which changes the formula for determining federal student loan interest rates. The law comes after months of partisan bickering, which culminated with the rate on subsidized Stafford Loans doubling to 6.8% on July 1.

The new legislation replaces a prior system where Congress set the rates each year (some might argue arbitrarily) and introduces a new market-based system that ties federal student loan interest rates to the government’s borrowing costs. The legislation will apply retroactively to student loans that originated July 1.

Under the new law, student loan interest rates will be tied to the 10-year Treasury note, plus an added amount. For this academic year (July 1, 2013, through June 30, 2014), the new formula will result in a fixed rate of:

  • 3.8% for undergraduate students borrowing subsidized and unsubsidized Stafford Loans (capped at 8.25%)
  • 5.4% for graduate students borrowing unsubsidized Stafford Loans (capped at 9.5%)
  • 6.4% for parents borrowing PLUS Loans (capped at 10.5%)