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What the Possible Stafford Loan Rate Spike Means

April 25, 2012

Student loans have begun garnering attention in the media lately, as time ticks ever closer to July 1st. They’ve become a hot ticket on the campaign trail, even making their way onto late night television. Why all the fuss? And what does it all mean for students, young adults and their families?

What are Stafford Loans?

As stated on their website,  Stafford Loans are:

federal student loans made available to college and university students to supplement personal and family resources, scholarships, grants, and work-study. Nearly all students are eligible to receive Stafford loans regardless of credit. Stafford loans may be subsidized by the U.S. Government or unsubsidized depending on the student’s need.

Students must be in school at least half-time to be eligible for Stafford Loans, and students may borrow up to $20,500 per year, depending on their status. Stafford Loans have a fixed interest rate, meaning the interest rate will not change over the loan period. The money for these loans is lent to the student from the U.S. Department of Education and taxpayers.

Subsidized loans are offered to students with financial need, based on the information provided on their FAFAs. While in school or other periods of deferment, students are not required to make payments to these loans, instead the government “subsidizes” the interest. Unsubsidized loans are not based on financial need. Any student can take out an unsubsidized Stafford Loan, however, interest is charged on this type of loan beginning as soon as it is disbursed.

The current interest rates for Stafford Loans varies on whether the loan is subsidized. For the 2011-2012 academic year, subsidized loans have a 3.40% interest rate while unsubsidized loans have an interest rate of 6.80%.

How Are They Changing?

On July 1st, the interest rates for subsidized loans will double, spiking from the current 3.40% interest rate to 6.40% for the 2012-2013 school year, unless Congress intervenes.

How Would a Spike in Rates Affect Me?

If you are seeking a loan for the 2012-2013 school year based on need, interest will affect how much you will end up paying over the life of your loan. SmartMoney illustrates what will happen to a student borrowing $11,300 in subsidized loans:

A jump in rates would be broadly felt: If rates were to stay at 3.4% for several years, a bachelor’s degree recipient with roughly $11,300 in total subsidized Stafford loans — the average amount, according to FinAid.org — would pay $15,630 over 20 years. If rates shoot up to 6.8% and remain there, this individual would pay an extra $5,125, or $20,755, over that period.

Why Would They Raise Interest Rates?

Student debt in the United States has reached $1 trillion, exceeding credit card debt. To help students, Congress passed the 2007 College Cost Reduction and Access Act, which froze interest rates on subsidized Stafford Loans and brought then down to a fixed-rate of 3.40%. This helps students, however, it is a heavy burden for the government to bear, costing up to $6 billion each year. Raising interest rates would save the U.S. Department of Education billions each year. You can learn more in this helpful NPR interview with Mark Kantrowitz from FinAid.org.

What Does Washington Think?

NBC reports:

Both Obama and Romney have expressed support for freezing the current interest rates on the loan for poorer and middle-class students but lawmakers are still exploring ways to pay for the plan. The issue is looming because the rate will double from 3.4 percent to 6.8 percent on July 1 without intervention by Congress, an expiration date chosen in 2007 when a Democratic Congress voted to chop the rate in half.

The Low Down

  • The increase in interest rates only applies to subsidized Stafford Loans issued after July 1, 2012.
  • Interest rates will increase from 3.40% to 6.80%.
  • Stafford Loans are fixed-interest loans, therefore, loans issued before July 1, 2012 will be unaffected by raised rates.
  • President Obama and Congress are searching for ways to delay the spike in interest.

With the approaching deadline, a college education may be on its way to becoming even more valuable than ever. As recent data suggests, this investment is fast becoming even more valued in the workforce. Although college costs keep climbing, a degree is still worthwhile, though you may want to consider protecting such a large investment. Tuition refund insurance can help you and your family protect the investment in education, you can learn more about tuition refund insurance here.

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