Federal student loan interest rates double to 6.8%

by Grace

Interest rates for federally subsidized college loans doubled to 6.8% on July 1, bringing subsidized loans up to the same rate as unsubsidized ones for any new undergraduates seeking assistance financing college”.

…  In 2007, both types of loans had an equal interest rate of 6.8 percent, but a bill in Congress gradually reduced the subsidized rate, reaching 3.4 percent in 2011. Its aim was to make college more affordable and was to last until 2013, but the reduced rates were ended for budgetary reasons and the law’s expiration was moved to 2012. Last June, it was extended one year in a compromise after President Barack Obama encouraged Congress to keep the lower rates.

Here are the updated interest rates, with yesterday’s change highlighted in red.

20130701.COCFedLoanRates2

* Interest is paid by the federal government during the in-school period.

Congress failed to reach a compromise before recessing last week.

… The Obama administration and Congressional Republicans supported a long-term change to how interest rates are determined for all federal student loans. Those plans differed in the particulars, but both would have tied interest rates to market rates, allowing them to rise without a cap as interest rates go up in the broader economy. Congressional Democrats pushed for a one- or two-year extension of the current 3.4 percent interest rate for subsidized student loans, arguing that the issue should be settled when Congress debates broader higher education legislation in the coming years.

According to a basic economic principle, when you subsidize something, you get more of it.

Student debt in the United States currently totals more than $1 trillion. College costs have soared,increasing 7.45 percent per year from 1978 to 2011 – a rate that exceeds both inflation and family income growth. The high level of debt and rate of default damages the economy by limiting other types of borrowing and delaying marriage and homebuying.

Related:  Why the extra Stafford loan subsidy should expire as originally planned (Cost of College)

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