Interest rates on subsidized federal loans are down–but what does that really mean?
July 13, 2012

By Priya Krishnakumar for Binksty.com

For the over 7 million college students currently taking out federal subsidized Stafford loans, last Friday brought good news as the Senate reached an agreement that will prevent interest rates on such loans from doubling from 3.4 to 6.8 percent.

Though students taking out subsidized federal loans can breathe a sigh of relief for the time being, Friday’s decision may have long-lasting implications. Here, we take a look at what the decision to prevent the spike in interest rates really means:

A temporary solution: While the interest rate increase has been staved off for the current year, these rates will once again be put up for contention in 2013, leaving students who receive subsidized loans in the dark as to how much interest they will expect to pay by next year. However, the amount students save under the new law is significant—according to a June 29 White House press release, the spike in interest rates would have cost students an extra $1,000 each year in increased payments. Students taking out unsubsidized Stafford loans or parent PLUS loans, however, are not so lucky—for them, the interest rate remains at 6.8%

Hidden changes to repayment conditions: For the past few days, the focus has remained largely on the stagnation of interest rates, but Friday’s signing brought to light to some of the more unsatisfactory and overlooked components of subsidized Stafford loans. Under Friday’s law, grad students will not be eligible for subsidized loans, and there will no longer be a 6-month grace period after graduation before interest begins accumulating on such loans beginning in 2014. However, that’s not to say that Stafford loans are all bad! Even with the 6.8% interest rate on unsubsidized Stafford loans, federal loans are often more reliable than private loans, because the rates are fixed and oftentimes offer more flexible repayment plans than their private counterparts.

An indication of a larger problem: Although Friday’s decision comes as good news to those taking out new Stafford loans, the problem of the United States’ crippling student loan debt is far from solved. Last week’s decision, though undoubtedly helpful to a new wave of college students, barely scratches the surface in dealing with the rising costs of a higher education. In the past thirty years, tuition at private universities has nearly tripled, while that of public universities has almost quadrupled. However, tuition rates are rising at a rate that is far disproportional to the rise in the average American’s household income. Student loan debt in the United States just passed the $1 trillion mark, surpassing the nation’s credit card debt for the first time—and while it’s a step in the right direction to keep interest rates down on such massive amounts of debt, more must be done to make higher education more affordable, and to make student loan debt less crippling.

With interest rates down for the time being, it’s important for Congress to continue to look for different and more effective solutions to America’s student loan debt, beyond just keeping interest rates at bay. However, with this bill out of the way, it’s more likely that the issue will pushed to the back burner again, unless a drastic change occurs that forces Congress to examine more permanent, long-term solutions.

 

Priya Krishnakumar is a rising junior at the Northwestern’s Medill School of Journalism. She writes for Binksty.com.