Some college students could pay higher interest rate on federal loans

College students taking out subsidized federal student loans will see their interest rate double in July unless Congress comes to the rescue.

The rate on subsidized Stafford loans is a fixed 3.4 percent, but that's set to expire and revert to 6.8 percent for new loans issued starting in July. (Old loans stay at their current rate.)


Subsidized loans, for which the government pays the interest while students are in school, are awarded to those in financial need. Unsubsidized loans, for which borrowers pay the interest, already charge 6.8 percent interest.

Legislation was introduced in the U.S. House of Representatives on Monday to maintain the current rate for another two years, although it's unclear whether lawmakers in a budget-cutting climate will go along. Meanwhile, there are other proposals from the Senate and the Obama administration that also would change interest rates starting in July, generally lowering them initially but potentially leading to higher borrowing costs for students and parents down the road.

Financial aid officers at some Maryland colleges say students at this point aren't focused on the doubling of the interest rate on subsidized loans.

They are more concerned about landing a summer job, or they might expect Congress to do what it did when the rate was poised to double in July 2012. Then, lawmakers delayed the rate increase for another year. Some student advocates are optimistic Congress will postpone the rate increase again, giving lawmakers time to take a broader look at financial aid.

But others aren't so sure.

"The last time was in the middle of an election cycle. It became an election issue. This time around, there is no election," said Mark Kantrowitz, publisher of FinAid.org, a provider of aid information. "Getting anything through Congress is difficult."

Besides, each year the rate stays at 3.4 percent costs the government $6 billion, and that likely would have to be made up somewhere, Kantrowitz said.

The impact of the rate increase also might not be enough to make families put political pressure on lawmakers to keep the rate the same, Kantrowitz added. The rate increase on the typical subsidized loan of $3,360 repaid over a dozen years would add about $925 to what borrowers must repay, or less than $7 per month, he said.


Barbara Miller, director of financial aid at Stevenson University, said the school hasn't sent out notices to families about the potential rate hike because Congress might make changes at the last minute, although she has discussed it with students and parents calling her office.

Those who hear about the rate increase appear resigned, knowing they need to borrow and the federal loans still would be better deals than using credit cards, Miller said. A little over 60 percent of Stevenson's undergraduates borrow from Uncle Sam, she said.

Many students could be more affected by other proposals to change the rates on federal loans starting in July.

President Barack Obama's budget proposal would create new rates that combine the interest rate on the 10-year Treasury note with a fixed rate of 0.93 percent for subsidized Stafford loans, 2.93 percent for unsubsidized Staffords and 3.93 percent for a Parent Loan for Undergraduate Students. This hybrid rate would remain fixed through the life of the loan.

Given the current low rate of about 1.67 percent on 10-year Treasuries, the new rates would be lower than the current student loan rates. For instance, the interest rate on a PLUS loan is now 7.9 percent, but could drop to 5.6 percent under Obama's proposed formula.

Similarly, legislation introduced by Republican Sen. Tom Coburn would make all rates on these loans the same: the 10-year Treasury rate plus 3 percent. Only subsidized Stafford borrowers would pay more than they currently do under this formula.


But today's Treasury rates are at historic lows, and if they go up as expected in the years to come, borrowers would pay much more. And neither proposal caps rates, so they could reach into the double-digits.

Indeed, both proposals are expected to generate savings for the government over time. Obama proposes to use this money to expand a borrower-friendly repayment plan to all students, Kantrowitz said. Coburn proposes using the savings to reduce the deficit.

The two proposals are far enough apart that a quick compromise on them is unlikely, Kantrowitz added.