Are You Ready for Your Student Loan Interest Rate to Double?

Education is important!

The Youth is the future of our nation.

The Youth need to be educated.

…but at what cost?

Annual tuition and fees at public four-year universities cost an average of $4,793 in 2001. Today, that price tag is $8,244-a 72% increase. Similar trends can be seen in private institutions and two-year degree programs. Now, unless Congress takes action, student loan interests rates will double for millions of borrowers, and it’s going to happen sooner than you think!  

Are you ready?

The Two Types of Stafford Loans

Before going into how these interest rates could double, you need to be familiar with the different kinds of Stafford loans. First, you have subsidized Stafford loans, which are awarded based on financial need. You will not be charged interest before you begin repayment or during periods of deferment. The federal government “subsidizes” (or pays) the interest during these times.

Second, you have unsubsidized Stafford loans, which are not awarded based on financial needs. Any eligible student can take out an unsubsidized Stafford loan. You will be charged interest from the time the loan is disbursed to the time the loan is repaid in full.

In 2007 President Bush signed the College Cost Reduction and Access Act. This act was created to temporarily reduce the interest rate on subsidized Stafford loans from 6.8% to 3.4%. This bill, which lowered rates to 3.4%, will expire July 1, 2012, and without action from Congress rates will return to 6.8%.

Who Will Be Affected?

The U.S. Department of Education estimates 7.4 million students will borrow $31.6 billion in loans in the twelve months following July 1st. Essentially, unless something is done, everyone who gets a subsidized Stafford loan after July 1st will be affected. What does this really mean? It means that students are going to be looking at an additional $1,000 in student loan debt per Stafford loan.

What to Do?

Both Republicans and Democrats believe the subsidized Stafford loan rates should not be doubled and agree on extending the current rate for another year. However, both sides have not agreed on how to pay for the $6 billion bill.


And…

On May 24th, the United States Senate rejected both the Democratic and the Republican plans to prevent the doubling of the current subsidized Stafford loan interest rate. Senators voted 62-34 against the GOP plan and 51-43 against the Democratic plan. Each plan would have needed at least 60 votes to pass.


This is bad, real bad!  If something is not done, tons of people, people who ultimately rely on subsidized loans will face a 6.8% interest rate instead of the current 3.4%!

The GOP Plan!

Interest Rate Reduction Act (H.R. 4628)

The GOP bill would have funded itself by eliminating a preventative health care program. You can find more details here

The Democratic Plan!

Stop the Student Loan Interest Rate Hike Act of 2012 (S. 2343)

The Stop the Student Loan Interest Rate Hike Act is legislation that would be fully paid for by eliminating a tax loophole that the watchdog agency, the Government Accountability Office, has determined is a problem. This loophole currently allows some privately held companies and professional businesses to avoid paying their fair share of Social Security and Medicare payroll taxes

“Screw you guys.. We have a plan!” ~ Senators Plan!

On June 6th the Comprehensive Student Loan Protection Act was introduced. This is a bill that would change the structure for all new federal student loans disbursed after July 1, 2012, and they would become fixed-variable rate loans. The bill would require the applicable interest rate for student loans to be equal to the bond equivalent rate of 10-year Treasury bills auctioned at final auction prior to June 1st plus 3%.

Lastly, it would direct any remaining savings left over to be sent to the Treasury for the purpose of debt reduction. The silver lining here is that the Comprehensive Student Loan Protection Act would apply to all types of student loans!  This is good b/c loans aren’t fixed at a set rate and will fluctuate with the market.  We need policy which is flexible and not rigid!

What is your plan?

Leave a comment below and tell us your plan to tackle the Stafford Loan Crisis of 2012. What would you do?

Comments

  1. Some students are better prepared for college than others. For instance, if you have to take a slew of remedial courses before you even get started, you're probably not someone we should take a risk on.

    Mediocre grades in high school is another indicator. Now, just because you're not well positioned to be successful in college doesn't mean you'll be a failure in life. It just means you should give more thought to professions that don't require a traditional four-year degree.

    People from modest means can still go to college. They'll just need to start with a community college or public university and pay for it. I just checked the annual, in-state tuition and fees for a full-time student at the University of Central Florida (my alma mater) and they're less than $6K a year. You don't have to be rich to pay that. Plus, you can borrow the money from a private lender, work, obtain private and institutional scholarships. There are all types of options.

    The government should still provide student loans, but I think they're doing too much. And their generosity is costing us a ton of money and saddling people who should've never went to college in the first place with debt they'll owe until the day they die . . . and then the taxpayer will pay whatever is left.
    My recent post How to Make Razor Blades Last Longer {Video}

    • URFinanceSimple says:

      I\’m not sure that mediocre grades in high school is a strong enough indicator of how someone will do in college. I beleive how a person does in school up until college is too heavily influenced by parenting / peers / location. Not all teachers / cities are the same. One part of town might have better books, instructors etc etc than another so a student may suffer educationally. Where as the middle class and rich probably are in neighborhoods who do not have funding or supply issues, thus giving 1 student an advantage over the other before even picking up a pencil.

      6k a year definitely isn\’t bad, for a person like you and I. But, remember 51% of the population does not save for retirement or have substation net worth. A report was just released specifying:

      The stunning drop in median net worth — from $126,400 in 2007 to $77,300 in 2010 — indicates that the recession wiped away 18 years of savings and investment by families.

      Dropping 6k a year on a child\’s education isn\’t such a small feat. The average family will literally put up nearly 8% of their net worth to send someone to college! No don\’t have to be rich to pay that but, I think we can agree that dropping 8% of your net worth on any item will take some serious consideration. Once again, the well off wouldn\’t have to worry about this problem.

      I say that to say this, I believe everyone should have a chance at higher education. I also think if the government was to do something, it should do something on the supply side, not the demand side. The cost of education is sky rocketing despite all these technological advances. Why do only courses cost the same as traditional classrooms? That\’s crazy talk.

      In a traditional setting, I understand why costs are high. You can only server a limited number of people, but in a online setting a teacher can serve a class of 200+ and still provide nearly the same level of service. I think certain things should not be allowed to run as businesses… education, prisons and healthcare are just a few.

  2. Shawanda says:

    I say let student loan rates double and slash funding for the program. This nation is sending too many unqualified and/or unsuitable students to college. I think student loans should be merit based, and to a certain extent, need based. But they should only go to the most needy who are positioned to produce a good return on the taxpayers' investment in their education.
    My recent post How to Make Razor Blades Last Longer {Video}

  3. AverageJoe says:

    What a quagmire. Count me among the people who think we're screwed because both sides can't look across the aisle without some "news" agency pointing it out and getting them in trouble for actually working with the other side. My solution? Dominique for supreme ruler!

  4. Well this doesn't affect me since I wasn't qualified for subsidized loans… ugh. I have no loans from undergrad but I'll be taking out loans for grad school. Grad PLUS and regular Stafford unsubsidized loans for me… fixed interest rate is already at the supposedly "doubled" interest rate.
    My recent post Bad Financial Advice From My Parents

  5. The gov't should simply stop student loan lending. Then watch tuition prices CRUMBLE!

    Just gotta guarantee tuition in the meantime for kids who want to go to school.

    Hey, that's what our Yakezie Writing Contest is here for. To help folks w/ educational expenses!

    S
    My recent post Why Invest In Certificates of Deposit (CD) When Rates Are So Low

    • URFinanceSimple says:

      Sam,That's a great idea, but no politician would do that and risk putting his job on the line. Thats an instant political attack.I believe without student loans, prices can't be kept high, but without student loans many people can't go beyond highschool.

  6. Instead of thinking how to prevent rising of loan interest, government should think how students could get education without incurring any loan. Those politicians need to be creative.

    • URFinanceSimple says:

      If a politician can create ways for students to get education without incurring any loans while saving tax payers money, then that politician will always have a job. Do you think it\’s possible? If so, then how?

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