Some Student Loan Rates Set to Double

Some Student Loan Rates Set to Double

Eileen St. Pierre, The Everyday Financial Planner

It’s about to happen again. Congress needs to make another financial decision that will impact the broad economy. This time the issue is student loan rates, and the deadline is July 1. It is on this date that the interest rate on some student loans jumps from 3.4% to 6.8%. The White House warns of dire consequences, prompting the creation of the website www.whitehouse.gov/dont-double-my-rates. But not all student loans are affected.

How did we get here?

It seems like a long time ago, but back in 2007 Congress passed the College Cost Reduction and Access Act. This piece of legislation cut the fixed interest rates on subsidized Stafford loans for undergraduate students to the following levels:

  • 6% for 2008-2009
  • 5.6% for 2009-2010
  • 4.5% for 2010-2011
  • 3.4% for 2011-2012

Rates were supposed to return to 6.8% for 2012-2013, but (surprise!) Congress passed a one-year extension. That extension expires on July 1.

Which loans are impacted?

First, let’s clarify a few terms. Stafford loans are no longer available. These loans were issued through the Federal Family Education Loan program with private lenders making the loans. Existing loans remain active.

The Health Care and Education Reconciliation Act in 2010 switched to Direct Lending for all new loans starting July 1, 2010. The federal government makes these loans directly through schools. What this means is that Stafford loans are now referred to as Direct loans.

This issue only affects subsidized Direct loans. Once the loan is disbursed, the interest rate is fixed for the life of the loan. So if these rates double on July 1, only those students who have not received the proceeds of their loans or have yet to apply will be charged the higher rate. In other words, if you already have student loans, you will not be affected despite what some politicians would like you to think.

Who is affected?

Only undergraduate students can take out subsidized Direct loans (effective July 1, 2012 graduate students are no longer eligible for these loans). Students must demonstrate financial need. Your school will determine how much you can borrow up to your financial need. For a subsidized loan, the U.S. Department of Education will pay the interest on the loan

  • while you are in school at least half time;
  • during the grace period (first 6 months after you leave school); and
  • during a period of deferment.

With unsubsidized loans, you do not have to demonstrate financial need. You are responsible for paying the interest on the loan during all periods. If you do not pay the interest while you are in school and during the grace and deferment periods, the interest will accrue and be added to your loan balance.

What’s going to happen next?

According to CBS News, two plans to resolve this issue recently failed in the Senate. One was a plan passed by the House to tie interest rates to the government’s borrowing costs. The other plan would kick the can down the road for another two years. The president has put forth a plan that would set the interest rate on federal student loans to the market rate, but that rate would remain fixed for the life of the loan.

One thing we can be sure of is that they will wait until the very last minute to make a decision, perhaps kicking the can down the road one more time.

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