Rate for Subsidized Stafford Loans Doubles

Congress has known for years this day was coming. But both the House and Senate cut out of town last week for the Fourth of July holiday without reaching an agreement on the student loan rates.

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As of today, the rate for all future subsidized Stafford loans is 6.8%. That’s for incoming freshmen as well as sophomores, juniors and seniors; anyone who will take out one of these loans.

“There’s no question that every time they make a move like this, it just gets harder,” University of Alaska Southeast Chancellor John Pugh said Monday.

Pugh said his school has done a good job educating future students about taking on too much debt. Counselors encourage incoming freshmen to utilize all types of financing available, especially Pell Grants. But those options are not available to everyone.

He said the typical student who gets subsidized Stafford Loans is often the first in the family to attend college.

“And they’re the most vulnerable for not understanding – they and their families – of not understanding of financing of higher ed,” he said.

The federal government pays the interest on the subsidized loans while a student is still in school.

Congress sets the rate at which students borrow and is willing to cede that power. Both the president and House Republicans want to peg the new rates to the ten year Treasury note. That’s the rate the government borrows at.

But many Senate Democrats, led by Education Committee Chairman Tom Harkin, don’t like the idea.

“We’re creating this debate year after year without getting any gain,” said Beth Akers, and education expert at the Brookings Institution.

Many hope Congress can permanently fix the problem. The president’s plan would lock in interest rates for the life of the loan, and the GOP version would reevaluate the rate every May.

For all the doomsday scenarios, Akers said the change isn’t as severe as it sounds.

“We’re talking about this doubling of interest rates like a really catastrophic thing has happened,” she said in a phone interview Monday. “But the reality is 3.4% to 6.8% for a borrower who’s borrowing the maximum amount of aid available to them, is about $40 a month. And that’s on a $300 payment.”

There’s an option many are floating: When Congress returns next week, it could pass a fix, and then retroactively enforce it.

And Congress could that to yet a different outcome: Congress could do what it did last year, pass a one year extension of the 3.4% rate, and have this fight again next summer.