Student loan interest rate issue could affect millions

Key Points

• Interest rate on subsidized student loans set to double on July 1
• Congress can%27t agree on fix to spare student borrowers from higher costs
• Rate increase from 3.4%25 to 6.8%25 could affect millions of borrowers

Federally subsidized student loans are a hot political issue now in Congress. Taxpayers have paid off tens of millions of dollars in student loan debt of government employees, including more than $20 million last year for loan debts of congressional staff members. Millions of others who have student loans enjoy no such benefit.

An estimated 7 million college students so far this year have received federally subsidized Stafford loans, which are awarded based on need. The federal government pays the interest on those loans while borrowers are enrolled at least half time, and borrowers take over when they leave school or their enrollment drops below half time. The interest rate for new loans, beginning next month, has been the focus of debate in recent weeks in Congress. Here is what it means for students and families:

What is happening with student loan interest rates?

Unless Congress acts, interest rates on new federally subsidized student loans known as Stafford loans are scheduled to double from 3.4% to 6.8% on July 1. No one wants that to happen. President Obama and Congress are debating a number of proposals that would prevent the rate from doubling.

Which loans will be affected?

Loans made before July 1, 2013, are not affected.

There are two kinds of federal Stafford loans. In subsidized loans, the government pays the interest as outlined above. In unsubsidized loans, the borrower pays all of the interest. The unsubsidized Stafford loan interest rate has been at 6.8% since July 1, 2006.

Get the Daily Briefing newsletter in your inbox.
The day’s top stories, from sports to movies to politics to world events.

Delivery: Daily
Your Email

Only subsidized Stafford loans would be affected if Congress does not act. (Using a calculation based on an undergraduate who goes to college for four years, earns a degree and borrows the maximum amount allowable for both subsidized and unsubsidized Stafford loans, the non-profit Institute for College Access and Success estimates that the rate change would cost borrowers an additional $4,000 under a standard 10-year repayment plan. This past year, new freshmen were allowed to borrow up to $5,500 in Stafford loans, including up to $3,500 in subsidized loans.

Some of the proposals being debated by Congress would change the interest rates on other loans for college, not just the subsidized Stafford loans. An analysis by the non-partisan Congressional Research Service projects that under one Republican plan, the interest rate would be capped at 8.5% for all Stafford loans and 10.5% for PLUS Loans, which are loans available to parents.

Should students rush to take out new loans before the July 1 deadline?

No, says Mark Kantrowitz, senior vice president of Edvisors Network, based in Cranberry Township, Pa. Eligibility for the subsidized Stafford loans is determined by the college, based on financial need. Students can’t borrow now to lock in the current 3.4% interest rate on next year’s loan.

This sounds familiar. Why is this happening?

As President Obama noted in a Rose Garden speech last month, “If this sounds like déjà vu all over again, that’s because it is.”

Congress passed legislation in 2007 that gradually lowered the interest rate on subsidized Stafford loans from 6.8% to 3.4% over five years. That legislation was set to expire on July 1, 2012, but Congress passed a last-minute, one-year extension.

The difference this year is that Obama and congressional Republicans want to make a long-term, market-based change in how interest rates are determined. Congressional Democrats want to extend the 3.4% rate for another year or two and address an overhaul of student loans as part of the Higher Education Act, which expires later this year.