Student Loan Rates Might Be About to Double, So Here's What It'll Cost You

The number's probably less than you'd expect


Well, nothing's set in stone yet, but as of today it seems a bit more likely that the interest rate on federally subsidized student loans will double from 3.4 percent to 6.8 percent starting next month. This afternoon, the Senate shot down a pair of proposals that could have stopped the scheduled hike -- one from Democrats, which would have frozen rates in place for two years while Congress figured out a long term solution, and one from Republicans, which would have based rates on the government's own cost of borrowing.

In the meantime, President Obama is threatening to veto a student loan bill passed by House Republicans, and the administration's own plan lacks momentum on the Hill. Maybe there'll be a compromise when the deadline hits. But maybe not.

So how much will it cost students if Congress doesn't act? Less than you might think, but more than some can probably afford. Let's take a look at the numbers.

Who's affected? 
More than 7 million new borrowers

First things first: If rates do go up on July 1, only new loans will be affected. This detail sometimes gets lost by the media, but it's crucial to remember. Old borrowers can breath easy knowing that they'll keep on paying whatever rate they enjoy today. 

Still, millions of next year's undergrads will be impacted. Subsidized Stafford loans (which are the only loans that currently quality for the 3.4 percent rate) make up just one third of all federal student loans issued today. According to the Congressional Research Service (CRS), that amounted 7.6 million borrowers in 2010 - 2011, and an estimated 7.4 million in 2012 - 2013.

Most aren't rich. It's a common misconception that subsidized Stafford loans are only awarded to poor and working class students. In fact, the government gives them out based on a formula for financial need, which takes into account the cost of tuition. That means upper-middle-class students attending expensive colleges sometimes benefit from them as well. But in the end, CRS reports that among dependent students in the 2007 - 2008 school year, more than three quarters of subsidized loan recipients were from families earning less than $70,000 annually. Almost half come from families earning less than $50,000. 

How much will it cost them? 
At most, about $39 a month

How much more students will have to pay if rates increase will of course depend on how much they owe in the first place. Undergraduates may borrow up to $23,000 worth of subsidized Stafford loans over five years. CRS recently ran the numbers, and found that over a standard 10-year repayment plan, a student who took out the max would face up to $4,600 in extra interest payments if the rates doubled. Some of that sting will get eaten away by inflation, but it's a noticeable chunk of change.

On a monthly basis, though, the numbers sound fairly manageable. Last year, when rates were previously scheduled to rise, New America Foundation's Jason Delisle calculated that keeping rates low for one year would save most borrowers around $9 a month. Meanwhile, CRS calculates that a borrower's monthly payment would increase $39 a month if they borrowed the maximum $23,000* at 6.8 percent instead of 3.4 percent.

For some people, that's the cost of a nice dinner out or two. For others, that's the difference between paying the electric bill or not. The bright side is that, if a student managed to borrow the maximum, that means they likely stayed in school long enough to graduate. In that case, they're more likely to be skimping on nights out than their utility bill.

Is this really a big deal?
Not compared to the other problems plaguing college finance

That brings us to the part where we stop talking strictly about numbers and start talking about values. Even if you believe that we eventually need to rejigger student loans so that their cost to borrowers better reflects their cost to taxpayers, now seems like a less than ideal time to raise rates on this particular set of loans. The economy is still tepid, particularly for the young. More than 13 percent of borrowers are defaulting on their loans within three years of going into repayment. Making the burden harder, even a tiny bit, seems a bit callous at this juncture.

On the other hand, we should realize that this is a relatively minor problem among the many and complicated issues plaguing our college finance system. Our most troubled student borrowers, on average, have relatively modest debts. Yet for whatever reason, safety valves like income-based repayment programs (which cap monthly payments at a reasonable percentage of a borrower's paycheck) and forbearance (which gives students a break on payments when they run into financial trouble) aren't saving them. I'm not sure adding or subtracting a few points from their interest rate will either.

*Correction: The article previously stated that interest payments would increase $39 a month if a student borrowed the $19,000 maximum allowed over four years. In that case, their payment would increase $32 a month.