The law, known as the Bipartisan Student Loan Certainty Act of 2013, will allow all undergraduates to borrow at a 3.9-percent interest rate this fall and graduate students to borrow at 5.4 percent, with both rates tied to the 10-year Treasury note.
The new rate for undergraduates is significantly lower than the 6.8-percent level to which the rate on subsidized loans had risen in July, after Congress failed to come to an agreement to keep it from doing so.
Subsidized loans, which are available only to undergraduates who demonstrate financial need, account for about one-quarter of all new student loans. The rates on other types of student loans were already at 6.8 percent or higher.
President Obama's signature comes after two years of political wrangling.Democrats had proposed freezing the rate on subsidized loans for two years to buy time to craft a permanent solution. Republicans favored tying the interest rates on all student loans to the 10-year Treasury note.
President Obama also proposed pegging interest rates to Treasury securities, although he favored caps to prevent rates from rising too high when the economy improves. He had vowed to veto an earlier Republican version of the legislation that did not include interest-rate caps.
The compromise legislation features caps of 8.25 percent on undergraduate loans, 9.5 percent on graduate-student loans, and 10.5 percent on PLUS loans.