Ouch! Your Student Loan Interest Rate Is About to Double

by InvestorPlace Staff | March 20, 2012 5:34 pm

[1]High school seniors and other college students preparing to borrow money to pay for their education may want to act fast. On July 1, student loans will become much more pricey[2].

As many as 8 million students will see their interest rates on federally subsidized student loans increase from 3.4% to 6.8%. The average Stafford loan borrower will pay back $2,800 more over a standard ten-year repayment plan with this increase. For students who borrow the maximum of $23,000 in federally subsidized student loans, this rate increase amounts to a $5,000 increase in the amount paid back over 10 years, and $11,000 if the payment plan stretches out over 20 years.

Democrats and Republicans have been sparring over the rate increase. Democrats want to keep the rates where they have been, at 3.4%, while Republicans favor a return to a 6.8% rate. The sides disagree about how much the 3.4% rate costs the United States: Democrats say it is $3 billion for the next year, while Republicans peg it at $7 billion.

While this would be a sharp increase, particularly for poorer students or students who may land jobs in less lucrative fields (or who struggle to find work after college), the rates pale in comparison to borrowing rates for other loans. Private student loans typically have 9% to 11% rates, and credit cards can reach up to 30%. Unsubsidized federal student loans are currently at a 6.8% rate as well.

Unfortunately, with budgets tight and with the possibility of low subsidized rates taking away from the government’s Pell grant program for low-income college students, this might be a case where the government is robbing Peter to pay Paul.

— Benjamin Nanamaker, InvestorPlace Money & Politics Editor

The opinions contained in this column are solely those of the writer.

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  2. become much more pricey: http://moneyland.time.com/2012/03/20/students-your-loan-interest-rate-is-about-to-double/

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