Student Loan Rates To Double

By Tim Parker | May 15, 2012 AAA

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.

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