Federal Subsidized Loan Rates May Double July 1

Federal student loan rates are set to increase July 1 if Congress fails to act and students may be on the hook for up to $5,000 on new loans.

Subsidized Stafford loan interest rates will nearly double increasing to 6.8% from 3.4% if Congress doesn’t pass legislation preventing the rate to go up, which would add up to $6 billion. The mid-summer hike would be untimely since it would hit new students heading into their freshman year. The hikes are only for subsidized loans, and will only impact those taking out new loans.

A similar rate hike show down occurred a year ago, and FinAid.org publisher Mark Kantrowitz says he doesn’t expect Congress to dodge the increase this go around. “I don’t think there will be any action on this because it’s not an election year,” he says, adding that there is no public policy benefit to having these interest rates kept low for borrowers.

What’s more, he says it’s better for the government to spend that $6 billion on grants rather than loans.

“The impact on individual borrowers is minimal, it saves them about $6 a month in terms of loan payments,” Kantrowitz says. “That is a cup of coffee. This isn’t the end of the world. Yes it makes college less affordable, but I’d rather they spend this on grants, because at least when they spend it on grants that reduces the amount of loans people take out.”