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How the Student Loan Interest Rate Hike Will Affect You

Student loans provide school funding for many undergraduate and graduate students.

Total student loan debt in the United States now hovers above $1 trillion, exceeding total credit card debt for the first time, and there are more than 37 million borrowers. Another shocking statistic: Almost 40 percent of those who took out student loans to help pay their way through college are under 30.

Congress has been deciding what to do with the rising debt and student loan interest rates. The deadline for a decision was today but Congress failed to reach a deal and interest rates doubled. Here is a breakdown of the student loan interest rate hike:

What: The interest rates on Federal Subsidized Stafford Loans have doubled from 3.4 percent to 6.8 percent. According to Congress’ Joint Economic Committee, this will cost the average college student an additional $2,600.

When: This change has been put into effect as of this morning.

Why: Back in 2007, Congress passed a bill that allowed student loan interest rates to gradually drop from the original 6.8 percent to 3.4 percent over the course of five years. In 2012, it was time to decide what would happen to the interest rates, but a consensus couldn’t be reached. An extension was put into effect to maintain the 3.4 percent interest rate for one year. That year has expired today and a solution has not been made.

Lawmakers could still potentially pass a bill to reverse the hike.

Proposals: House Republicans have passed a law that would address student loan interest rates in the long run. Under this plan, interest rates would change every year, varying with the market, starting with the 10-year Treasury note. The student loan interest rates would essentially pay down the deficit.

President Barack Obama proposed a solution in his FY2014 budget request, which prevents the rates from doubling. Like the Republican proposal, the President is proposing that the student loan interest rates be tied to the market. However, the rate will be locked in for the life of the loan once issued and not fluctuate according to the status of the economy each year.

The projected rates on federal Stafford Loans could rise to 7.7 percent in 2023 under these proposals, according to the Congressional Budget Office.

What This Means for You

The good thing about this rate hike is that it will only affect federal subsidized Stafford Loans that are issued on or after July 1, 2013.

Stafford Loans are available to both undergraduate and graduate students and are generally the most affordable. There are two kinds of Stafford Loans: Subsidized and unsubsidized.

Subsidized Stafford Loans are available to students that can prove financial need. The government pays the interest on these loans as long as the student is enrolled at least part-time in school. Unsubsidized Stafford Loans are available to all students and don’t require proof of financial struggle. However, unlike the subsidized loans, the student is responsible for the interest accrued while enrolled in school.

For any loans issued prior to July 1, the existing rate is locked in.

Steps You Can Take to Prepare

Subsidized Stafford Loans will still be more affordable than unsubsidized loans and private loans. However, taking out student loans to pay for your higher education should be a last resort. Universities and colleges almost always offer grants and scholarships to help pay for school. Filling out a Free Applications for Student Aid (FAFSA) will also help determine eligibility for Work Study programs.

If your only alternative for funding your education is to take out student loans, educate yourself on the options available to you. Your FAFSA will help define how much money you are qualified to receive, under specific interest rates.  You can look into subsidized and unsubsidized federal loans, PLUS Loans available for parents and graduate students, and private loans.

When the time comes to repay your loans, avoid going into default. If you foresee having difficulty repaying student loans, talk to your provider and they will work something out with you.

There are several repayment plans and options that are available for student borrowers. Some include:

Loan Consolidation: Under this program, student loans will be consolidated into one loan with a fixed interest rate. In other words, instead of making multiple payments to various lenders, you will make one monthly payment with a weighted interest rate.

Income-Based Repayment (IBR): IBR plans are based on income, family size and state of residence. The payments are capped at 15 percent of the borrower’s discretionary income. IBR does not apply to loans in default, Parents PLUS Loans, Perkins Loans or uninsured private loans.

Pay As You Earn Repayment: This plan is also known as Obama’s Student Loan Program. Monthly payments are based on similar requirements as the IBR, but they are capped at 10 percent of the borrower’s discretionary income. This plan offers the lowest monthly payment amount if you are facing financial hardship.

The student loan interest rate hike should not deter you from furthering your education. Everyone deserves to attend the college or university of their choice. Make it your responsibility to educate yourself on the issues that surround your future and the options available to you.


Cecillia Barr is a personal finance writer and blogger for – America’s Debt Help Organization.

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