Why Your Student Loan Interested Rate Could Double in July

Education, Money, Taxes

student debt defaultInterest rates for new Stafford loans will rise to 6.8% from 3.4% on July 1st unless Congress acts. Only loans taken out after the July 1st deadline would be subject to the higher interest rate; loans made before this would not be affected.

Republicans and Democrats Seek Solution

Republicans and Democrats alike are in favor of keeping the rates on student loans low, but the exact terms under which that should happen is unclear. President Obama has stated he’s not in favor of proposals that pay down the deficit with income from higher rates, and that keeping interest rates low on loans – not just Stafford, but others, too – is crucial.

Obama along with Republican members of Congress want to change the way the rates are determined, from taking that decision out of the hands of Congress and tying rates to 10-year Treasury notes. Some Democrats want to extend the rates for the short term, and achieve a long-term solution when it comes time to renew the Higher Education Act.

Last year at this time, Congress passed an extension to a 2007 bill that was responsible for lowering the rate to 3.4%. Unsubsidized loans have been at a 6.8% interest rate since July 1, 2006.

Controversy Over Student Loans Continues

Stafford loans were created under the Higher Education act of 1965, only given the name “Stafford” in 1988. They are available to eligible students as both subsidized and unsubsidized loans, depending on a student’s financial needs, and are subject to maximum loan amounts. The federal government pays interest on subsidized loans for as long as the student is enrolled in school at least half time. Students with unsubsidized loans are responsible for paying all of the interest. Once a student is out of school, or drops below half-time enrollment, there is a six-month grace period before repayment begins.

The majority of college students take out loans to help pay for college. Figures for the class of 2011 show the average student loan debt upon graduation was $26,600. The Institute for College Access and Success estimates that the increase from 3.4% to 6.8% could cost a student $4,000 more over the life of a standard 10-year loan, pushing a student’s total debt well over $30,000.

The issue of student loans was large in last year’s presidential election, with both candidates stressing the importance of making higher education affordable. The controversy isn’t over whether loans should be available, but over the terms of the loans and how much the government should profit from them. The federal government makes a reported 36 cents on every dollar loaned, estimated to bring in $34 billion next year. The decision to pay down student debt for federal employees with taxpayer money has also been called into question.

Monday Deadline for Decision

President Obama will meet with members of Congress to discuss the student loan issue Tuesday afternoon and a decision must be made by next Monday, July 1st.