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Student loan interest rates double today

By Christina Couch · Bankrate.com
Friday, June 28, 2013
Posted: 5 pm ET

It looks like things are about to get even tougher for low-income college students. Today the interest rates on subsidized Stafford loans double from 3.4 percent to 6.8 percent, and despite myriad proposals, Congress didn't block the rate hike from happening. Designed to help the neediest undergraduate students afford higher education, subsidized Stafford loans prevent interest from accruing on the loan while the student is in school -- the Department of Education actually pays it -- and are only available to students who financially qualify.

With the interest rate doubled, those taking out new loans "will incur about $1,000 more in costs per student per loan," says Chris Lindstrom, higher education program director for the U.S. Public Interest Research Group. Since students usually take out a new Stafford loan for each year of school, that amounts to a $4,000 loan increase over a standard college tenure, Lindstrom says.

Few believe that Congress will act fast enough to prevent the rate hike from happening, but there's still hope for legislation that will go into effect retroactively. The Bipartisan Student Loan Certainty Act, sponsored by Sens. Angus King, I-Maine; Joe Manchin, D-W.Va.; Tom Coburn, R-Okla.; Richard Burr, R-N.C.; Tom Carper, D-Del.; and Lamar Alexander, R-Tenn., ties rates on new subsidized and unsubsidized Stafford loans to the 10-year Treasury note's interest rates plus 1.85 percent. For the upcoming school year, that would keep new unsubsidized loans at a rate that's only slightly above the current interest rate and would cut the rate on subsidized Stafford loans (which apply to a broader base of students) by nearly half, according to a summary of the bill issued by Coburn. Graduate unsubsidized loans and Plus loans would also be tied to the Treasury note rate plus 3.4 percent and 4.4 percent, respectively.

"This agreement is very much like the proposal in (President Barack Obama's) budget, it is very much like the proposal passed by the Republican House of Representatives and it will save billions of dollars in interest for all 11 million students taking out loans this year by dropping rates on all student loans," Alexander said in a joint statement.

Not all are championing the new measure. The Institute for College Access and Success criticized the bill for not including an interest rate cap on Stafford loans.

"While it keeps the rate low in the short term, which is what we all want ... it pays for it by jacking up rates substantially on borrowers after three years," says Lindstrom. "While we need to be stopping the rate from doubling, we shouldn't be doing it in a way that actually drives up student loan debt overall -- and that's what that plan does."

The Bipartisan Student Loan Certainty Act is the newest stab at a student loan solution, but there are others still on the table. In May, the House passed a similar measure, which tied all Stafford loans to the 10-year Treasury note rate plus 2.5 percent. Plus loans for graduate students and parents would also be tied to the Treasury note rate plus 4.5 percent, with a cap of 10.5 percent. Sen. Tom Harkin, D-Iowa, has also proposed freezing subsidized Stafford loans at their current 3.4 percent rate until a more permanent solution can be found.

In the meantime, students have no choice but to brace for a financial blow. If you qualify for subsidized Stafford loans, Lindstrom says that the rate hike is something to keep in mind when considering how much you can afford to borrow over your college tenure. Colleges most likely will not offer additional scholarship or grant aid to make up the difference, but you should still let your financial aid office know that the rate increase is making college financially tougher.

"It's certainly worth it to call and complain that your rate went up," Lindstrom says. "That might influence the college to do more and look for more funds to offer to students that they don't have to repay. That type of feedback is going to be really helpful."

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4 Comments
Haha
June 30, 2013 at 4:11 pm

Worth of payments on time, they would "forgive" that amount. So lets be honest, if they did choose to let the rates to back to 6.8% (which it was for graduat students when they used to be able to get them, also the rate on undergraduate students until 2008) it would impact a small group on new borrowers. If they chose to keep it the same, that means the amount of people getting these loans will dwindle, and all the other borrowers of unsubsidized & plus loans will have to tighten their belts further. The senate & houses plans are a much fairer way to borrow. 10 year treasuries have been below 3% for years now, since 2008 unsubsidized stafford loans have stayed at 6.8 while plus loans have been at 7.9%. With few options to lower them ever during the life of the loan. And that's the true tragedy the politicians & news media seem to ignore.

Haha
June 30, 2013 at 4:03 pm

Either one of the proposals is better than the current situation. Last year when we had this issue, to keep the rate of a subsidized loan @ 3.4 %, they removed the interest subsidy that used to occur during the 6 month grace period after school, remove graduate students from being eligible for them, lowered the income eligibility to get a sub loan, and previous the dept of Ed offered a principle cancelation incentive to all direct Loan borrowed ranging from .5% to 2% where if u made ur first years worth of