Putting The Rate Increase On Student Loans In Perspective

Congress failed to stop the interest rate on one type of student loan from doubling starting Monday, but it’s hardly the crisis some consumer groups are making it out to be. (An e-mail from CalPIRG dubbed it “Student Loan Apocalypse.”)

The hyperbole is aimed at getting Congress to pass a retroactive rate cut before school starts in the fall, perhaps as part of a larger overhaul of student loan rates. But it might be causing some borrowers unnecessary angst.

The increase applies only to new subsidized Stafford loans taken out on or after Monday. These loans go to students from low- and middle-income families and made up 38 percent of all federal student and parent loan dollars disbursed in 2011-12.

It does not affect unsubsidized Stafford loans (which are available to all students) or Plus loans (for parents and graduate students).

It will not raise the price of existing loans.

The rate on new subsidized Stafford loans will double to 6.8 percent. That’s the same rate the government has charged on unsubsidized Stafford loans since 2006 and less than the 7.9 percent charged on Plus loans.

The government pays interest on subsidized Stafford loans while a student is enrolled in college at least half time and will continue to do so.

Payment on these loans is not required until six months after students leave school.

By comparison, students owe interest on unsubsidized loans from day one, although they can defer making payments until they leave school.

Deferred interest is added to the loan balance.

The doubling of rates will not affect access to college; students will be able to borrow just as much as before. It will affect them in repayment, but the average increase will be modest.

The average subsidized loan amount (for one year) is $3,357 and the average amount of subsidized debt at graduation is about $9,000, according to Mark Kantrowitz, publisher of Edvisors Network.

Over a standard 10-year repayment term, doubling the interest rate on $3,357 in debt increases the monthly loan payment by less than $7. On $9,008 in debt, the increase is less than $18.

For borrowers who graduate with large student debt relative to their income, the government has various programs that reduce monthly payments and eventually forgive remaining balances.

Some experts say it would make more sense to put taxpayer subsidies into these programs, which are based on a borrower’s ability to pay, rather than maintaining lower rates on subsidized loans. The reason: There is no guarantee that students who qualify for subsidized loans will be low-income when they leave college.


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