Without intervention by Washington lawmakers, Subsidized Stafford loan rates are set to rise on July 1st leaving new students with an interest rate significantly higher than they previously planned for. How did we come to this and will this be a repeat of the debt ceiling debates that left Congress with its lowest approval rating in recent history?

SEE: An Introduction To Stafford Loans

The History
According to the New York Times, in 2007 President George W. Bush signed into law a bill that reduced the interest rate on Subsidized Stafford loans. That bill allowed students to receive a 3.4% interest rate but it is set to expire on July 1st of this year. That will restore the subsidized Stafford loan to the same rate as the Unsubsidized Stafford loan at 6.8%.

The Mechanics
FinAid reports, the cost of college tuition roughly equals to twice the inflation rate. So the cost to receive a four year college education is out of reach for most families unless they save through a 529 plan or other means. Perspective students have to qualify for scholarships and grants, or apply for student loans. Many students apply for both but federal loans come in two main types: The unsubsidized and subsidized Stafford loans.

Unsubsidized loans don't require students to make payments while they're enrolled in college, but the 6.8% interest continues to amass from the day you sign the papers for the loan.

The subsidized loan is different. The federal government pays all of your interest while you're a full-time college student, and once you graduate, you take over the principal and interest payments six months later but your interest rate is only 3.4%. Those with a subsidized Stafford loan pay an average of $1,000 per year less than those with an unsubsidized loan.


The Conflict

It seems so simple. Both President Obama and the presumptive Republican presidential candidate, Mitt Romney both agree that Congress has to act to keep the rate from doubling. However Republicans aren't ready to rubber stamp the bill.

Making the interest payments for millions of college students costs taxpayers more than $6 billion annually, and this, according to some lawmakers, is money that the country doesn't have. Democrats propose paying for the extension by closing a loophole where owners of S corporations don't pay full payroll taxes.

How It Works
If Congress doesn't act, the rate will double to 6.8%, but for those who already have a subsidized loan at the 3.4% rate, the rate will remain. Because both the unsubsidized and subsidized loans are fixed rate loans, only loans taken out after July 1st would receive the 6.8% rate. This means that an incoming freshman who takes out $23,000 for a four year subsidized loan will pay an extra $38 per month once the payments begin. A college senior, with a $5,500 Subsidized loan, will only pay an extra $9 per month.

The Bottom Line
According to statistics, two-thirds of all college students now take out student loans to pay for their college education. In 2008, the average college student had more than $23,000 in loans upon graduation. With one out of every two graduates either unemployed or underemployed often in a job outside of his or her college major, making the payments on these loans is what may lead to the student loan crisis that some economists fear.

Lawmakers believe that help for present and future college graduates is important, especially in an election year, but as of now, they haven't agreed on how to pay for the help.

Related Articles
  1. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  2. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  3. Retirement

    Birch Box Review: Is It Worth It?

    Learn more about the convenience of the subscription beauty box industry, and discover why the Birchbox company in particular has become so popular.
  4. Credit & Loans

    Student Loan Forgiveness: A New Route

    DeVry (and other for-profit) students & grads, pay attention: An obscure direct-loan program reg could make it possible to have student loans forgiven.
  5. Personal Finance

    University Donations: Which Schools Got the Most

    A closer look at the staggering $40.3 billion donated to colleges and universities in 2015.
  6. Personal Wealth & Private Banking

    Women, Invest In Your Financial Literacy

    Becoming financially literate should be on the to-do list of anyone who is not.
  7. Savings

    How to Save Your First $100,000

    Saving your first $100,000 requires the discipline to put money away and control your spending. But just remember – the savings get bigger as you go.
  8. Economics

    What is the American Dream in 2016?

    The American Dream is still alive and well, but it looks very different than it used to.
  9. Retirement

    3 Reasons Why This Is the Perfect Time To Visit Greece

    Discover three reasons why now is the best time to visit Greece, including the favorable exchange rate and the country's unrivaled hospitality.
  10. Credit & Loans

    Debt Forgiveness: How to Get Out of Paying Your Student Loans

    There are income-based plans and forgiveness for public-service employees. The latest wrinkle: loan forgiveness because the school defrauded you.
RELATED FAQS
  1. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. Who is eligible for student loan forgiveness?

    Your eligibility for student loan forgiveness depends on the type of student loan in question. If you have a federal loan, ... Read Full Answer >>
  3. What’s the difference between the two federal student loan programs (FFEL and Direct)?

    The short answer is that one loan program still exists (Federal Direct Loans) and one was ended by the Health Care and Education ... Read Full Answer >>
  4. Can Sallie Mae loans be forgiven?

    Sallie Mae loans, similar to other private loans, cannot be forgiven. As of 2015, there is no option for private student ... Read Full Answer >>
  5. Can Sallie Mae loans be consolidated?

    Sallie Mae loans can be consolidated with other federal loans, but not with private loans. For federal loan consolidation, ... Read Full Answer >>
  6. How does Sallie Mae disburse funds?

    Sallie Mae is the number one provider of financial aid and student loans in the United States, servicing over 25 million ... Read Full Answer >>
Trading Center