The Impact of Student Loans Doubling

Olivia Clifford |

With thousands of students across the United States relying on student loans to pay their college tuition, it should come as no surprise that July 1's doubling of interest rates from 3.4 percent to 6.8 percent aren’t being taken lightly. Congress left Friday June 28 having made no new decision effectively allowing the 50 percent increase to take place. Stafford Loans, which are need based undergraduate loans known for not accumulating interest while students are still in college, have had an interest rate of 3.4 percent since 2007. These loans, which are need based and determined by the Free Application for Federal Student Aid, had an interest rate of 6.4 percent prior to the 2007 change. 

The new interest rates are only going to affect those students who apply for the loans after July 1, 2013. The previously issued loans interest rates are locked in for the life of the loan. According to the Economic Committee brief that was done by Sen. Amy Klobuchar, the impact will be $1250 of added interest on each student loan over a 10-year payment plan. There have been many discussion and plans to remedy this impending issue, but the Senate and the House have not been able to come to a majority decision. Thought the interest rates have already doubled, many officials are not worried as they plan on coming to a decision within the next couple weeks making their plan retroactive so that those applying for the loan after the July 1 deadline won't have to pay the 6.8 percent interest.  

President Obama’s Plan: 

President Obama presented his reform plan in early June. With his plan the rates of student loan interest would vary from year to year depending on the conditions of the market. The loans would then be tied to the yield on a 10-year Treasury bond plus a .93 percentage points. This would make it possible for the interest rates to be even lower then 3.4 percent in good market conditions but higher in bad ones. President Obama stressed the importance of making sure that the interest rates given on each loan were locked in for the life of the loan. 

Republicans Plan: 

The Republican party, who hold the majority currently in the House of Representatives, have generated a plan similar to that of President Obama. They are proposing that the interest rates of the loans vary depending on the market as well with three distinct differences. Similar to Obama’s plan the loans would be linked to a yield on the 10-year Treasury bond, but instead would have a 2.5 percentage point addition. The other two notable differences come from the proposal to not offer a better rate for subsidized loans versus unsubsidized loans and they are asking that the interest rate of the loans are never locked in they are constantly fluctuating. 

Democratic Party:

The Democratic representatives are calling for a different proposal all together. They are proposing to extend the already extended current rate of 3.4 percent for another year or two. The idea behind this extension is to give Congress enough time and a chance to reform student loans. They are also proposing that they have a student loan interest that reflects the Federal Reserve charges back at .75 percent.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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