Student loan interest rates expected to increase
Published: Wednesday, May 23, 2012
Updated: Wednesday, May 23, 2012 18:05
Interest rates on federal subsidized Stafford education loans will double—from 3.4 percent to 6.8 percent—on July 1 unless Congress intervenes.
In 2007, the College Cost Reduction and Access Act gradually decreased interest rates temporarily on newly originated subsidized Stafford loans for undergraduate students—from 6 percent in 2008 and 2009 to 3.4 percent in the 2011-2012 year.
From 2009 to 2010, fixed interest rates on subsidized Stafford loans were reduced to 5.8 percent. In the 2010-2011 year, the interest rate on subsidized Stafford loans was lowered even further to 4.5 percent, before finally reaching 3.4 percent in 2011-2012.
If no Congressional action is taken, the rate for a new undergraduate, subsidized Stafford loan will rise to 6.8 percent.
Stafford subsidized loans do not gather interest while the recipient is still in school and are based on financial need.
On the other hand, the interest rate on unsubsidized Stafford loans has remained static at 6.8 percent.
Unsubsidized Stafford loans are not based on financial need and do accumulate interest, despite whatever the student’s academic status may be.
“I don’t expect [the federal government] to raise the rates [on subsidized loans],” said Julie Martinez, financial aid advisor at Citrus College. “It wouldn’t be a good idea for the student; it wouldn’t be helpful. They’re talking about how many students have such a great debt right now that—[for] them to raise the interest rates—wouldn’t help anybody.”
Subsidized Stafford loans have gained appeal because the government pays the interest on them while the students are in college. Meanwhile, students who take out unsubsidized Stafford loans are responsible for the interest as soon as they begin borrowing.
The increased interest rate will have no effect on federal education loans made prior to July 1, though it will affect an estimated 7.4 million students intending to acquire subsidized Stafford loans this upcoming fall semester.
“I don’t see how I’ll be able to take out loans if [the interest rate] doubles,” said
Frances Hernandez, 20, a sophomore at Citrus College. “I’ll have to find another means of paying for my schooling.”
With student fees and college tuition rising across the nation, students have become more reliant on seeking grants and/or loans to help cover the costs.
According to The New York Times journalist Jonathan Weisman, “American students took out twice the value of student loans in 2011, about $112 billion, as they did a decade before, after adjusting for inflation.”
Accumulated national debt from student loans ranges from $870 billion to an estimated $1 trillion—greater than that of either credit cards or auto loans.
The Federal Reserve Bank of New York has estimated that nearly 37 million Americans are in debt from student loans—nearly two-thirds of which are held by people under the age of 30.
According to the White House, the increased loan rate will cost students $1,000 in interest, based on the average $4,200 borrowed in federal educational loans per year and averaging 12 years to pay back the money borrowed.
“They’ve been lowering the rebate fees and origination fees on loans [over] the past few years, so it just doesn’t make sense for them to suddenly let the loan interest rate increase, except the country needs money,” Martinez said. “It’s a large population, but still it’s [such] a small population that you wouldn’t think it would help the federal government that much to raise the rates.”
Both president Barack Obama and presumptive Republican presidential candidate Mitt Romney have stated their positions against the increase in loan interest rate.
In proposing to tackle the issue of student debt, both men have addressed middle-class America, as well as the enormous burden threatening economic recovery.
"Given the bleak job prospects that young Americans coming out of college face today, I encourage Congress to temporarily extend the low rate," Romney said in a statement.
Members of both parties in Congress are contemplating ways to cover the costs and win the votes in the House and Senate.
According to San Gabriel Valley Tribune journalist Ben Feller, “All parties involved have political incentive to keep the rates as they are.”