Federal Stafford Loan interest rate increase: Who it affects

President Barack Obama walks to stage to discu...

President Barack Obama walks to stage to discuss student loans in the Diplomatic Reception Room.

This week there was some bad news for college students hoping to get a subsidized federal student loan, called a Stafford Loan, to help pay for college. Congress has allowed the interest rate for subsidized loans to double from 3.4% to 6.8%, which is the current rate for unsubsidized loans. The new rate starts July 1, 2013 and affects students who are newly applying for the loan or are renewing their loan after July 1. According to CNNMoney, about one-third of college students who need federal financial aid get a Stafford Loan.

What is a Stafford Loan?

A Stafford Loan is federal financial aid for an accredited college or university. Backed by the U.S. government, the loans are offered at a substantially lower interest rate than student loans from private institutions. Eligibility requirements for a Stafford Loan are strict, and students must first complete a Free Application for Federal Student Aid (FAFSA). The interest rate for Stafford Loans varies depending on whether the loan is subsidized or unsubsidized and whether the student is an undergraduate or graduate. Once the loan is taken out, the rate is fixed for the duration of the loan. For more information, visit www.staffordloan.com.

Why the interest rate increase?

The interest rate for new Stafford Loans was scheduled to double as of July 1, 2013 unless Congress made changes by that date. As the deadline was looming, a writer for Credit.com said in the April 2, 2013 blog, “Fight to halt the college loan rate jump heats up,” “Though it seems members of Congress may be able to eliminate this rate increase, one expert thinks that the fact this jump is occurring in a non-election year may lead to it going through as planned. FinAid.org publisher Mark Kantrowitz told Fox Business that due to a lack of public policy interest on this matter for some lawmakers nationwide, the doubling of rates could end up happening.”

And it did. Congress failed to agree on how to change the rate increase before everyone left for the July 4 vacation. In a report by Jennifer Liberto for CNNMoney.com, “Student loan rates doubling on Monday,” June 30, 2013, students are not happy. “I find it really frustrating that nothing is even being brought up, since Congress is now in recess,” said Rachel McGovern, who will be a senior at University of Florida this fall and will be taking out $5,500 in subsidized federal loans. “It feels like they’re just ignoring student needs right now.”

Ideas to change the rate hike

Many in Congress want to change the rule or extend the July 1 deadline. Democratic Senators Kay Hagan (N.C.) and Jack Reed (R.I.) want to freeze the 3.4% rate until next year. President Obama wants to tie the interest rate to yields on 10-year Treasury notes. Meanwhile, House Republicans want to tie the interest rate to market-based rates, meaning the loan interest rate would change every year. When Congress returns from recess, a new vote to extend the 3.4% interest rate until next year is scheduled for July 10.

Consequences of the interest rate increase

The increased interest rate is expected to affect more than 7 million students this year, and cost students roughly $6 billion in additional interest payments. According to a HuffingtonPost.com writer in “Senate student loan proposals fail to advance as rate surge looms,” June 27, 2013, “Though the federal government pays the interest while borrowers remain enrolled in school, the increase will lead to an extra $1,000 owed over the typical 10- to 12-year life of the average borrower’s loan.”

The added interest creates a domino effect: Higher interest adds more to the total loan amount. Students become even more in debt as they enter an already harsh economic future. If students can’t pay back their loans, their credit score may go down. A low credit score makes it harder for a person to obtain other loans, for say a car, home or business.

Will you try to get a Stafford Loan this year, even with the higher interest rate?

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