Loan interest could double

A law subsidizing common Stafford Loans is set to expire June 30.
April 29, 2013

Students could pay more to borrow federal student loans as early as this summer if a deal isn’t reached in Congress. 

Interest rates for Stafford loans — the most common type of federal student loan — are set to double this summer, returning to their 2008 rate.

The law that subsidizes these loans will expire June 30, raising the rate from 3.4 percent to 6.8 percent and allowing the loans to accrue interest while students are still in school.

The debate on subsidized student loans is a familiar one for Congress. Last summer, policymakers granted a one-year extension for undergraduate students when the same rate increase was scheduled. Graduate student loans, however, lost the federal subsidy.

“Last year, the undergraduates really benefited from the pressure of the presidential campaign,” said Kris Wright, director of the University of Minnesota’s Office of Student Finance. “There was a lot bigger forum to talk about education issues.”

English senior Jena Ohman said the loan increases could hurt students already grappling with debt.

“It’s scary because it’s hard enough to get a job, and this will add on more debt,” she said. “Everyone is already in enough debt as it is.”

In 2012, the White House estimated more than 7 million students nationwide would pay more for their student loans if the rates increased. In Minnesota alone, more than 207,000 students have taken out the loan, according to the White House.

The rate won’t be retroactive. Borrowers who have taken a subsidized Stafford loan in the past still won’t be required to pay interest that accrues until six months after graduation.

If the rate increases, federal Stafford loans taken out as of July 1 would accrue interest at the higher rate, even while students are still in school.

Ohman said having more loans that accrue interest while students are in school concerns her.

“It’s scary because it’s suggested that I start paying off the interest on my loans before the six month [grace] period,” she said. “But with the way jobs are right now, that is going to be hard.”

At the University, students can seek counseling about student loans from One Stop Student Services. In addition, Wright said the school is working on an online calculator to help students see the long-term impact of the loans they take out. 

Other options are available to help after graduation, including the federal Pay As You Earn program.

The program allows graduates to make payments at 10 percent of their discretionary income, offering lower repayment plans for graduates with low starting salaries. The balance of student loans is forgiven after 20 years.

Though the interest rate increases are widely unpopular, many in Congress are avoiding another one-year extension and instead vying for long-term solutions.

One solution proposed by President Barack Obama would tie the federal loan interest rates to market rates each year.

Wright said this plan would benefit students in the near future as market interest rates are low. However, she’s concerned about future rates as the economy improves.

“Unlike a mortgage, students can’t renegotiate the interest rates on these loans,” she said. “… If [students] have the misfortune to go to school in a high interest rate time, they will have to pay those high interest rates for the life of the loan.”

Some consumer groups have also criticized Obama’s plan because it doesn’t provide a maximum rate.

In a statement released earlier this month, the Young Invincibles, a nonprofit group that advocates for policy decisions that affect 18- to 34-year-olds, said students should pay less for loans when interest rates are low and more when those rates are high.

“However, without the protection of an interest rate cap, a market-based rate could be disastrous for students,” the statement said. “It poses the risk that interest rates will shoot upward.”

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