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Interest Rate Increases on Some Federal Student Loans

July 15, 2013

What's the difference between subsidized and unsubsidized loans? With subsidized Stafford Loans, the federal government pays the interest while the student is in school, during the six-month grace period after graduation, and during any loan deferment periods. With unsubsidized Stafford Loans, the student pays the interest during these periods. Eligibility for subsidized Stafford Loans is based on a student's financial need, as determined by the federal government's financial aid application, the FAFSA.

According to a June 2013 report entitled The Causes and Consequences of Increasing Student Debt by Congress' Joint Economic Committee, the rate increase on subsidized Stafford Loans will result in the average college borrower paying an additional $2,600 in interest over the life of the loan (a standard 10-year repayment term), and will cost an additional $4,500 in interest over the life of the loan for students who borrow the maximum aggregate subsidized Stafford Loan amount of $23,000 during their undergraduate years.


Background

You may have heard in the news that Congress was working on a bipartisan solution to avoid the interest rate increase. Yet despite several last-minute attempts at compromise, lawmakers disagreed over key details and no single plan won sufficient support.

A House bill passed earlier this year would have tied the interest rate on Stafford Loans (subsidized and unsubsidized) to the 10-year Treasury note plus 2.5%, with the rate resetting (variable) each year. President Obama in his budget also proposed linking the rate on Stafford Loans to the yield on the 10-year Treasury note, but with a smaller difference between the two, and more importantly, fixing the rate for the life of the loan. The Senate had its own ideas, with Democrats and Republicans differing in the way the rate should be determined and other details, such as whether the government should use some of the money it makes on the loans to reduce the federal deficit. In the end, a deal didn't get done and the rate on subsidized Stafford Loans doubled from 3.4% to 6.8% on July 1 as it was scheduled to do.

The issue has taken on added significance after many reports, including some by the Federal Reserve Bank of New York, have shown that despite more aggressive debt shedding by American consumers since the recession, student loan debt continues to grow (it now surpasses total outstanding credit card debt) and has increasingly become a financial black cloud for many students and their parents. Indeed, many observers have raised questions about the student debt domino effect on the overall economy as there are now 37 million borrowers with outstanding student loans.


What's next?

There's talk that legislators will reach a deal after they return from their July 4th recess, and that any deal will apply retroactively. In the meantime, students who plan on taking out new subsidized Stafford Loans for this academic year will need to wait and see whether their interest rate will stay at 6.8%, and colleges will be waiting to see what happens as they prepare to send out fall semester bills. Stay tuned.

 

Compass Financial Group, LLC. Is a registered investment advisory firm located in Dublin, Ohio. We take the time to get to know you and specifically identify what it is that you and your family value most. With this knowledge, we then work with you to develop a custom approach and position your financial model so that you are situated with the best possible opportunity to achieve your dreams.