The Overblown Student Loan Interest Rate Debate: Why Congress’ Next Move Won’t Really Affect Your Loans

It’s all over the papers: unless Congress takes action this week, student loan interest rates will double from 3.4 percent to 6.8 percent on July 1. If I heard that the interest rate on my loan was doubling, I’d be furious. And most people are genuinely upset about this news. Parents, students, President Obama… there’s a lot of pressure on Congress to take on the student loan issue and extend those low interest rates.

But guess what? It doesn’t matter.

If Congress doesn’t act by the end of the week, it probably won’t affect you or your kid’s loans (at least not enough to make a stink about it).

Not everyone will be affected, and even if you or your child is part of the minority, the damage is probably minimal.

Who will be affected by doubling interest rates?

Undergrads that take out new subsidized Stafford loans: That’s about 7.4 million student. Not insignificant.

Any college student that takes out a subsidized Stafford loan after July 1, 2012 will be charged 6.8% interest. Interest does not accrue on a subsidized loan while the student is in college. Students do not have to make payments on subsidized federal student loans after graduation, but new legislation means no more 6-month grace period: interest begins accruing right after a student gets her diploma.

Who won’t be affected?

Borrowers with existing subsidized Stafford loans: If you already have a subsidized Stafford loan, take comfort knowing that your interest rate is locked in at 3.4%.

Borrowers with other federal loans: The interest rate increase only affects subsidized Stafford loans.

If I have a subsidized Stafford loan, how much will it cost me?

The Obama administration has estimated that the average student borrower would pay $1,000 more over the lifetime of her loan if interest rates double.

I can see the headlines on Monday now: Congress steals $1,000 from poor, debt-ridden students!

Well… that might be a stretch. In fact, the founder at Finaid.org estimates that an increased interest rate wil more likely cost a student $761 over 10 years. That’s about $6 or $7 per month extra.

$6 or $7 a month extra? Is that what all of this fuss is about?

The Wrong Debate

So maybe it’s not the actual dollar amount that matters – it’s the principle of the thing. With college costs and student borrowing out of control, a doubling interest on a loan just adds insult to injury. No one wants to be buried further into debt, especially students that are halfway through college and already thousands of dollars in the hole.

But whether or not Congress should or shouldn’t maintain a lower interest rate on a specific type of federal loan is the wrong argument right now.

What if politicians, families, parents and kids scrutinized the cost of higher education and how we’re choosing to pay for it instead?

You don’t have to wait for Congress to decide your financial future for you. There are some critical questions to ask yourself before borrowing that shouldn’t matter whether a subsidized Stafford loan has a 3.4% or 6.8% interest rate, like:

  1. Am I getting the best value for my money?
  2. Does my son need to borrow that much money to go to school?
  3. Will my daughter earn a good return on investment if he’s $30,000 in debt after graduation?

If you and your family make the right borrowing decisions to pay for higher education, you won’t need to pay attention to the political circus in Washington.

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4 thoughts on “The Overblown Student Loan Interest Rate Debate: Why Congress’ Next Move Won’t Really Affect Your Loans

  1. Money Beagle

    I can’t imagine that they’ll simply let this happen. All that anybody has been doing is lowering interest rates everywhere. If students/grads are forced to pay high rates where everybody else gets to borrow for next to nothing, there will be outrage. Not good in an election year. I think it’ll get taken care of.

    Reply
  2. jefferson

    this country needs more highly trained individuals, not less. we are already falling behind. helping more kids go to college and subsidizing loans should be prioritized above defense, above entitlements, above nearly everything, in my opinion.

    Reply
  3. femmefrugality

    I agree with Jefferson. You do make a ridiculously good point about the perceived gravity of the situation. It’s still $761. But really, it’s not all that much in the long term. Not at an individual level. The lenders will be making a ton of money off of it though. I think the costs for school are way too high. I don’t really understand why they’re skyrocketing aside from cuts in federal and state programs.

    Reply
  4. Call Me What You Want Even Cheap

    That is just crazy! It really is much better to try and go to school without getting into debt. Working to pay your way, getting scholarships, or finding a job that will pay for your education are all better options. It takes a lot of work, but it’s worth it.

    Reply

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