Student Loan Rates Could Double if Congress Doesn’t Act Soon

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The total amount of outstanding student loan debt exceeded $ 1 trillion last week, and that number appears only set to grow as tuition rates continue to rise and federal and state funding for school drops.

The Consumer Financial Protection Bureau reported that student loan debt topped $1 trillion—nearly 16% higher than an estimate by the Federal Reserve Bank of New York earlier this year.

And there’s more bad news: Students borrowing money from the government may face an increased interest rate on their loans if Congress doesn’t act soon.

Lawmakers must decide by June 30 whether or not to continue the provision from the 2007 passing of The College Cost Reduction and Access Act, which reduces subsidized Stafford student loan interest rates to 3.4% from 6.8%  over a four-year period for families needing financial assistance. If this provision isn’t extending, students and their families will see their loan interest rates climb to 6.8%.

Nearly eight million students use subsidized loan to help pay for college, but the nation’s growing deficit is forcing Congress to cut to funding in many areas, including money for higher education, says Mark Kantrowitz, publisher of and

“We’re effectively in what is called a ‘zero sum game,’ where any increases in spending in one area require cuts in another area.”

Read: Saving for Tuition vs. Retirement: Which is More Important?

Democratic Rep. Joe Courtney of Connecticut, who has introduced legislation preventing the rate hike, says he has seen a powerful reaction to the provision on both sides of the aisle, as well as from the American public.

“We know that if the rates double, interest costs are going to add another $5,000 to $10,000 on graduates’ student loan debt and that’s something that I think students and families see much clearer frankly than the budget rules of Washington,” he says.

What this means for students

According to consumer group U.S. PIRG, borrowers taking out the maximum $23,000 in subsidized student loans over four years will see their interest increase by $5,200 over a 10-year repayment period and $11,300 over a 20-year repayment period.

Spencer Pritchard, a freshman studying political economics at UC Berkeley, is currently borrowing the first year maximum $3,500 in subsidized Stafford loans, and expects to borrow the maximum every subsequent year of his college tenure. If interest rates double, Spencer would be looking at paying around $4,000 in loans once he graduates.

“This may require me to take a job that I otherwise would not take--I am interested in community organizing, which is usually a low-paying job, but if I am swamped in debt then I might have to choose a more lucrative job offer that would otherwise not be my first choice,” he says. “Holding more debt would also deter me from making big decisions such as buying a home, car or getting married until further in the future.”

Read: Student Loan Grace Period Over: Now What?

Some experts argue that allowing the interest rate on subsidized loans to double again may deter students from seeking out federal student loans and turn to private loans, which could lead to even higher debt amounts as these loans are rarely capped and tend to have higher rates.

“I’m quite sure there will still be a substantial amount of people who are willing to take on the debt even at a higher interest rate and that’s kind of a mixed bag because we want people to go to school but we also want them to be able to be successful when they’re repaying those loans,” student loan expert Heather Jarvis says.

Effects of the provision

Kantrowitz explains that even if Congress keeps interest rates at 3.4% on Stafford loans, the Pell Grant program, has a high chance of getting terminated.

The Pell program allows lower-income students to borrow a maximum of $5, 550 for the 2011-12 award year (July 1, 2011, to June 30, 2012) without repayment.

“Realistically you’re pitting one aid program against another, and given the choice of cutting grants and making the loans less expensive or letting the interest rates go up, the lesser of the two evils is to allow the interest rates to increase,” he says.

Jarvis says that should the rates increase again, students having difficulty repaying their loans will have to rely on programs like the extended repayment plan or the Income Based Repayment plan.

“There would be far more people facing delinquency or default on their student loans without the availability of income based repayment,” she says. “[It] is a relatively new protection and it is still very underused and should be talked about more in schools and amongst the loan servicers.”

Read: Saving for Tuition vs. Retirement: Which is More Important?

Students are listening up as their future debt situation hangs in the balance. US PIRG is reporting that they have delivered 130,000 letters to Congressional leaders from students asking them for their support to extend the interest rate cuts.

Courtney says that more co-sponsors are lining up to support the bill and that they will continue to push it to prevent rates from doubling.

“This is not the magic bullet to solve all of the problems,” he says. “Having said that, there’s no question that we have a very clear choice with a very clear deadline facing us in terms of whether or not all of the negative trends that we’re seeing in terms of rising student loan debt is going to be compounded if we don’t act.”

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