Recently, Congress failed to pass a measure that would have prevented interest rates from rising on subsidized Stafford loans that help students pay for college. Since 2008, the interest rate has been lowered incrementally.
However, the rate reduction expired July 1. That means rates have now doubled to 6.8 percent.
Although there were last-minute efforts by senators to keep the rate from increasing, lawmakers remained gridlocked.
Subsidized vs. unsubsidized loans
Stafford loans are student loans guaranteed by the federal government. A Stafford loan can either be subsidized or unsubsidized.
A subsidized loan can be used for undergraduate studies. Students who are able to demonstrate a financial need are eligible. If a student qualifies for a subsidized loan, the government will pay the accrued interest as long as the student is enrolled at least half time and meets other qualifications.
By contrast, unsubsidized loans can be used for both undergraduate and graduate studies, and there is no requirement to demonstrate a financial need. With an unsubsidized loan, the government will not pay the interest. Therefore, the student is responsible for interest accrued.
What happens to existing loans?
If you are in repayment status or enrolled in college, the new rates will not impact your loan.
However, if you are now scheduled to receive a disbursement, you can expect higher payments. The new rate, which doubled from 3.4 percent to 6.8 percent, will increase the amount the borrower is responsible to repay.
Although Congress failed to prevent the increase in rates, there is still a chance the rate could be reduced. It depends on whether Congress takes action upon its return after the holiday.
What should you do?
If you are scheduled to receive a disbursement, you may want to consider delaying it until Congress acts. This way, if the interest rates are reduced, you will still be able to take advantage of the lower rates. However, this is just general advice. It is wise to consult with a financial professional who understands your situation before making major financial decisions.
Also, consider other sources of financial aid, such as scholarships and grants for which you may qualify. Contact your school's financial aid office to learn more.