Many students entering college this fall and beyond could be in for a rude awakening: a significantly higher interest rate on Stafford Loans. If Congress doesn’t take action by July 1, the interest rate on future government subsidized Stafford Loans could double to 6.8% from 3.4%.
While both Democrats and Republicans support keeping the rate at the current level, they disagree on how to fund the extension—causing gridlock on Capitol Hill and leaving students and their families holding their breath. As of Thursday afternoon, lawmakers have reported reaching a tentative agreement to fund the passage, but nothing official has been passed.
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Stafford loans are available to families earning less than $70,000 per year, and experts say the potential increase would hurt the families that can least afford it.
Overall, the increase would mean that student borrowers’ payments would increase by about $800 over the 10- year loan period. According to calculations by Mark Kantrowitz, publisher of FinAid.org, students will pay an additional $761.
“Overall, the increase is going to mean an additional $6 per month in terms of the loan payment, so the impact on the individual is small,” he says. “However, with so many students, it’s going to mean an additional $6 billion to the government. It’s been a little bit overblown, but it’s always better to have interest rates remain constant than have them increase.”
Although the current rate increase will only affect approximately 3% of student loans, for borrowers it’s still a “really big deal,” says Libby Nelson, reporter for InsideHigherEd.com.
“This is certainly not the largest issue facing federal financial aid programs today, but for borrowers who were worried about not being able to repay their loans in the first place, it’s a huge concern.”
If an agreement isn’t reached, any rate increases wouldn’t not be retroactive. Only students taking out loans after July 1 will face the interest rate hike.
“Students who are being issued promissory notes within the next couple of weeks are probably the most anxious, but by fall it should be settled one way or another,” Nelson says.
One thing Congress should keep in mind when making a decision on the rate increase is that it’s only the most vulnerable students who will be affected by the new rate, says Health Jarvis, a lawyer specializing in student loans and founder of http://askheatherjarvis.com/.
“[An increase would be] on the backs of the people who are least able to afford it,” says Jarvis. “With everything else going on in the economy, it seems like a bad time to put anymore costs on those students. Right now we have close to 50% unemployment among recent college grads, and it isn’t the right track for our country to charge more money. The cost of student borrowing is already too high, and this is just pouring salt onto the wound.”
Historically, the interest rate on student loans hasn’t made a difference in how many people enroll in or graduate from college, according to Kantrowitz. However, more students may start opting for cheaper university experiences if rates continue their upward trend.
“More people are faced with economic decision of what their asset—their diploma—is really going to be worth,” says Ken Kamen, financial advisor and principal at Mercadien Asset Management. “If you know that you can’t make enough money working to get a return on your investment in your education, then what is it really worth? It used to be acceptable for kids to go ‘find themselves’ in a liberal arts college, but today, that’s simply not a financially viable option.”
Parents that were expecting to send their children to an Ivy League school are now investigating smaller private universities, and are increasingly considering small two year “starter” colleges, he adds.
“Once a student breaks down the cost of the loan and sees that their monthly payment is going to be $260, it suddenly becomes important to them. Unfortunately, many of them don’t think in those terms and once they graduate they have this diminished spending and saving power that haunts them for years.”