Is the Interest Rate on Your Stafford Student Loan About to Double?

Written by Briana Fabbri

May 21, 2012 • 3 minute read

Improving Your Finances

Improving Your Finances

Total student loan debt in the U.S. grew to over $1 trillion in April. With the average individual debt at $23,300 and climbing in an economy where graduates are struggling to find jobs, the situation is becoming a hotly debated topic in the media and on the political campaign trail.

Some experts consider the unrestrained student debt growth to be as risky as the mortgage loan crisis that spurred the economic collapse in 2008.

With college enrollment growing exponentially and state funding shrinking, the burden of increased tuition costs has been placed squarely on the shoulders of the students. Roughly 67% of students borrow money from the government or private lenders to attend college, up from 45% in the early 1990s. The cost of getting a bachelor’s degree has increased faster than the rate of inflation, and according to the Department of Education, the average cost will more than double from 2001 to 2016 if the current trend continues.

This all coincides with the looming expiration of some loan subsidies on July 1, 2012. Earlier in May, the Senate could not agree on a plan to maintain the rate of Stafford federal loans at 3.4%. Stafford loans are fixed-rate student loans for undergraduate and graduate students attending college at least half-time. If you qualify for a subsidized loan, the government pays the interest while you are in school. As of now, any new Stafford loans issued after July 1 will have a rate of 6.8%, double the previous rate; this would add approximately $1,000 over the life of the loan.

But before anyone packs up and moves back home with Mom and Dad, there are two important factors to keep in mind:

1. The increase only affects the interest rates for NEW subsidized Stafford loans issued after July 1, 2012. So the following loans will not be affected:
   • All loans other than Stafford loans
   • All existing Stafford loans (interest rates are fixed for life at the time of the loan)
   • All new subsidized Stafford loans issued between now and July 1st, 2012
   • All new non-subsidized Stafford loans (including those for grad students)
2. Luckily for most students, this is an election year and increasing student loan rates is politically unpopular for Democrats and Republicans alike. While there was some initial push back from the Republican side of the aisle, both parties have now agreed that the subsidies should be extended. There is a still a lot of political wrangling over this issue, but in the last weeks, President Obama has called for legislation to extend the lower rate.

If you are planning on getting a new subsidized Stafford loan after July 1 and you don’t trust the politicians to come through with an extension, you might want to consider the following:

1. Even at 6.8%, Stafford loans may still be the lowest cost option to finance your education. For the average loan size ($3,350), the interest rate hike should only increase monthly payment by an average of $6. Plus, student loans are a type of personal loan, so they are not collateralized and frequently have high default rates; for this reason, competitive rates for loans that are not government sponsored may have higher interest rates.
2. If you are unable to make the payments on your Stafford Loan, the government offers income based payment plans and payment deferment of up to 3 years if you lose your job.
3. After 25 years of making qualifying payments, the balance of the Stafford loan is forgiven. There are also loan forgiveness programs if you pursue a career in public service.