How Much Will The Student Loan Rate Hike Cost Students?

It's summer break and a holiday weekend. So students heading to college in the fall might have missed some big news this week. The interest rate doubled for a common federal student loan.

Because Congress didn’t act, the interest rate for one kind of student loan is going up.

“Prior to July 1, those rates were at 3.4 percent.”

Now the rate’s doubled.

“On July 1st, they moved up to 6.8 percent.”

That’s Megan McClean. She’s a director with the National Association of Student Financial Aid Administrators.

Before students panic, she points out this impacts just undergraduate students who take out a certain kind of loan.

“Subsidized student loans.”

They’re also known as subsidized Stafford loans. They make up about a quarter of all federal loans to students.

“So subsidized student loans are where the federal government pays the interest while students are in school. And they are a need based loan. The student’s need is taken into account.”

A student can apply if the cost of college is more than what their family can pay.

Next year in Texas almost half a million students are expected to get these federal subsidized loans.

Now that the interest rate has doubled, how much will this cost them?

Jessica Thompson is an analyst with the Institute for College Access and Success. She’s been running the numbers.

“If we take a student, let’s say the student borrows the maximum amount of subsidized loans and then completes the rest of their federal loan eligibility for each of the four years with unsubsidized loans ..”

Assume they graduate in four years.

That leaves a total loan balance of 27,000 thousand dollars.

“And if we look at 3.4 percent versus 6.8, we see that student pays nearly 4,000 dollars more in interest payments over the course of 10 years. That could increase further if they pay for longer.”

Thompson says it’s not too late for Congress to act. She says lawmakers in Washington could extend the low interest rate for another year – just like they did last year.

But analysts say students need a permanent solution.

Again, Megan McClean with the National Association of Student Financial Aid Administrators.

“For a while now, we’ve been having these kinds of yearly fixes to the interest rates and it’s not predictable and it’s not sustainable.”

Her group supports a totally different approach.

The interest rate would follow the market. But once a student takes out a loan their interest rate would be fixed.

“Each time you took a new loan out the rate you would be given would be in line with what was going on in the market at that time, but then it would be locked in for the life of the loan.”

There are three proposals with that approach from the White House and in the Senate.

Jessica Thompson with TICAS has analyzed how they would impact students long-term — when interest rates are expected to be higher and not at these low rates.

She says that math leaves future students even worse off than if the interest rate just doubled.

And that, she says, goes against the overall goal to make college more affordable, not more expensive.

Bio photo of Laura Isensee

Laura Isensee

Education Reporter

Laura Isensee covers education for KUHF, including K-12 and higher education.

Previously, she was a staff reporter at The Miami Herald and regularly contributed to WLRN, the local NPR affiliate and Miami Herald news partner...