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Doubling of Stafford Interest Rates May Cost Only $6 More a Month


The New York Times, May 10, 2012
By Tanya Caldwell

The Senate may have failed to act on a bill that would have prevented the doubling of interest rates for some student loans, but the inaction may not matter much. According to two experts on financial aid, if the interest rate on Stafford loans doubles to 6.8 percent this summer, as scheduled, students would pay only about $6 more a month for one year of loans.

What’s more, Mark Kantrowitz and Lynn O’Shaughnessy write in an Op-Ed essay in The Times, the rate increase won’t affect previous loans, only new loans borrowed for the 2012-13 school year.

Here is an excerpt from their analysis:

The proposals that Congress has been debating would extend the 3.4 percent interest rate for only one year. If a student borrowed the average subsidized Stafford loan ($3,357) at 6.8 percent for the next school year, the higher interest rate would boost the borrower’s debt burden by $761 over a 10-year repayment period. Even if the interest rate doubles, the monthly payment on the subsidized Stafford loan would increase by only about one-sixth.

What few observers seem to appreciate is that the low rate of 3.4 percent took effect only last July. As recently as 2007, the rate was 6.8 percent. The Democrats made reducing the interest rate on student loans into a winning campaign issue in 2006 and they fulfilled their campaign promise by ushering through the College Cost Reduction and Access Act of 2007, which gradually reduced the subsidized Stafford rate over a four-year period.

Congress often passes this sort of legislation with a 5- or 10-year window, so it’s reasonable to ask whether this political battle was anticipated by Congressional Democrats, who knew they would gain political brownie points if the Republicans, in the months preceding a presidential election, balked at extending the low rate. (Each party has added conditions to the rate extension that are unacceptable to the other side. Republicans want to pay for a one-year extension on the lower Stafford rate by taking $6 billion out of the preventive health care fund established by the 2010 health care legislation; Democrats want to cover the tab by cutting oil subsidies and closing a corporate tax loophole.)

Mr. Kantrowitz and Ms. O’Shaughnessy go on to argue that families with college students have higher priorities than whether Stafford interest rates should double, like the new rules that make it tougher to qualify for Pell grants; “why the interest rates on other federal college loans remain so high even though interest rates are at historic lows”; and the fact that student loans, unlike other loans, cannot be discharged in bankruptcy.