Personal Finance

April 26, 2013

Student loan rates could double in July

Unless Congress acts, rates on new subsidized Stafford loans will rise from a fixed 3.4 percent to 6.8 percent. Stafford loans, which don’t require repayment until six months after leaving school, account for more than a third of federal student aid.

Now would be a good time to watch interest rates — and Congress — if you’re planning on tapping into a widely used federal student loan program to send your incoming freshman to college.

That’s because rates on new subsidized Stafford loans are scheduled to double July 1 from a fixed 3.4 percent to 6.8 percent. Stafford loans, which don’t require repayment until six months after leaving school, account for more than a third of federal student aid.

By one estimate from the U.S. Public Interest Research Group, a consumer advocacy organization, a doubling of interest rates could add $1,000 to the cost of the loan per year per borrower.

There’s some confusion surrounding the potential effect of a rate increase. It would hit only those students taking out new subsidized Stafford loans from midyear on. Students with existing subsidized Stafford loans would not see a rate increase — unless they take out a new loan after June 30 for the next school year.

If that sounds familiar, it’s because the same warning about a possible doubling of rates came last year until Congress — in the midst of an election year — granted a one-year reprieve.

Make no mistake, 3.4 percent is a great rate. On the other hand, 6.8 percent is not so good when most other interest rates are at historic lows. But Congress has estimated that the double-down would generate an additional $6 billion in federal revenue.

There may be yet another 11th-hour rescue this spring. President Barack Obama’s budget plan included a proposal to shift to a variable interest rate on Stafford loans. The variable rate would be pegged to the government’s cost of borrowing and it would be reset every year.

Many Republicans have endorsed that idea. Meanwhile, the Senate recently passed a resolution extending the 3.4 percent rate indefinitely.

While both political parties hammer away at each other, the clock keeps ticking closer to July 1.

I wouldn’t count on anything more than another short-term, midsummer fix coming out of Congress. It seems easier to continue to kick the can down the road another year rather than address the bigger-picture issues of making college more affordable.

Given that college admissions letters and financial aid packages are starting to land, there’s not much that families in the graduating class of 2013 can do but watch the political drama unfold.

But for families still a year or two away from college bills, I suggest concentrating even more on ways to minimize potentially crushing debt:

• Pay more attention to the cost of college early in the selection process. Most schools now post net price calculators on their websites to help families estimate the true cost of attending. I also recommend checking out the Department of Education’s College Scorecard, which provides information from the family’s perspective on borrowing costs, average student debt and loan default rates of potential schools on your students’ list. Like buying a house, a new car, or a 60-inch big-screen TV, don’t overextend your budget when it comes to college. That may mean saying no to the top choice, which is also a financial reach.

• Connect the dots for your high school student. Point out how good grades, advance placement credits and extracurricular activities can lead to scholarships (free money) that will whack thousands of dollars off tuition, room and board.

• Finally, if taking on debt is unavoidable, encourage your student to pay it off aggressively.

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