This past July, Congress failed to strike a deal on federal student loan interest rates. Because of this, student loan interest has doubled from 3.4% to 6.8%; however this doesn’t affect all student loans nor does it affect all students. Regardless, this is still a major loss for students in terms of financial aid and paying for college, and this can spell trouble for newcomers.
Worst of all, the seemingly large interest rates will hurt even more once students graduate. Because of this, there are a few things one should consider when taking out and paying off loans, new and old. So, how will those already in debt be affected? Will this change student loans altogether? And what does this mean for you?
Who will be affected by this new interest rate?
If you’re already out of college and a part of the $1 trillion of student debt, you’re somewhat in luck. You won’t be affected much by this increase in interest; you’re free, aside from making your usual payments. Individual rates will vary depending on whether you have sought help to consolidate your existing loans. The students that are really going to feel the pain are the new undergraduates that recently graduated high school in the Spring of 2013, and any other college student, undergraduate or graduate-professional, that will be taking out loans in Fall 2013 and onward.
So what federal student loans will be affected?
The rates on currently existing subsidized Stafford loans will not change, and they will stay at the 3.4% interest rate originally offered to those students that signed them. Only new, subsidized Stafford loans will take the hit and double in their interest rates. The rates on new and/or existing unsubsidized loans however will have no change, staying at 6.8%. PLUS Loans interest rates will also see no change, remaining at 7.9%. Kind of makes you wonder what the point was when the government pays the interest as long as the student is enrolled half-time. No wonder we’ve hit the debt ceiling.
Will loan payments be increased?
Although the interest rate is going up, the loan payment itself will not see a large increase. Think of a loan payment like paying off a credit card. You have a balance to pay off to get your debt down to 0; the same rule applies for paying off a loan. If anything, there will be a small, almost unnoticeable change for future, new subsidized loans. Now, you may be thinking, but the government is paying the interest, why worry? Well, this is true until you graduate. And that’s where they get you; once college is over, you get hammered with the new, larger interest rate, as noted above.
How largely will this affect your average borrower?
Although the interest rate has doubled, it’s not as dramatic as it seems. If you’re a student with a subsidized loan, and you’re going to be applying for another one in the Fall, you’ll notice about a $20 increase in your monthly payments, give or take a few dollars. Many will try to play this down, because what’s $20 of a student paycheck? Maybe 1 or 2%, no big deal; except for the student that could use that $20 for groceries, school supplies, or the other expenses of student life. There’s a small difference between those who do and do not receive a bachelor’s degree, but again only by a few dollars.
So when does the increased interest rate storm hit?
As previously mentioned, the government pays the interest on subsidized loans while a student is enrolled at least half-time at an institution, therefore the student only needs to worry about their loan payments whilst in school. The match won’t hit your wallet until you graduate and end your educational endeavors. You can always dodge this for a bit by enrolling in graduate school if you’re not already burnt out from four years of studying, and then there’s the 6-month grace period Stafford federal student loans tend to come with. This “grace period” is basically the time you have, free of payments, until the interest rate hits and you need to own up to your debt. So, you basically have 6 months after graduation to figure out whether or not you want to seek employment or continue your education.
As it stands, there is no definitive future for a retroactive change on these interest rates. However, the federal government is cooking up a new move to drop the interest rates back down, but make them contingent on the market. That could spell trouble down the line, but let’s not worry about that just yet.
Elaine McPartland is a writer for Consolidated Credit, offering her services and knowledge of money and debt to people in need of some professional advice and financial solutions. If you’d like to contact her, she is on Google+ and Twitter.