Subsidized Student Loan Rate Doubles

Tuesday, July 9, 2013 at 12:05 PM by

Interest rates for many subsidized student loans doubled on July 1, potentially raising education costs for thousands of students in Wisconsin.

The interest rate for subsidized Stafford loans increased from 3.4% to 6.8% last week. The federal government makes about $28 billion in subsidized Stafford loans a year, accounting for one out of every four dollars of loans provided by the federal government. The change in interest rates will affect new student loans, not the loans already in existence.

The 3.4% rate was originally set to expire in 2013, then pushed back to 2012 as part of a compromise with Republicans, and then changed again to 2013. This excellent explanation at the Washington Post has more details about the history of subsidized Stafford loan rates as well as the different plans advanced by various policymakers to address the increase in loan rates. 

Higher interest rates on subsidized student loans would make higher education more expensive for students from low- and moderate-income families, and could increase the overall debt level for students. Already, 71% of undergraduate students at the University of Wisconsin take out loans, owing an average of more than $27,000 at graduation. High student debt load has been blamed for slowing the economy, according to the New York Times:

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

The increase in student loan rates will not have an immediate effect on students, because subsidized Stafford loans do not accrue interest while the student is still in school. Congress could still pass legislation that retroactively reduces the student loan rate back to its previous level, sparing students from higher interest rates.

Some policymakers, like Senator Tammy Baldwin, are optimistic that Congress can successfully address higher student loan rates. But this Congress has had a great deal of difficulty passing any legislation at all. In fact, if trends continue, this Congress will be the least productive one since the 1940s in terms of legislation passed. In the current political climate, there may not be a quick path to addressing the increase in student loan interest rates.

Tamarine Cornelius

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