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Student Loan Interest Rates to Double and Might Go Variable

If Congress does not take action the rate subsidized student loan holders pay will double July 1, 2013 from 3.4% to 6.8%. Student loan interest rates have been set by Congress and kept artificially low as a way to encourage education. But a vote in the House yesterday about a Republican proposal is set to have some very dangerous and significant impact for those holding student loans.

Under the Republican proposal, which cleared the House along party lines, the cost of student loans would adjust yearly in accordance with the cost of borrowing by the government.

President Obama had a similar proposal in April but under his plan the interest rate would be fixed when the loan was taken out.

An Obama administration spokesperson said, “A rate that continues to vary after the loan has already been taken out would create uncertainty and lessen transparency for students and their families who are making decisions about borrowing for college.”

But can you imagine the financial carnage that would ensue if student loan payments adjusted up? With more owed on student loans than credit cards, student loan debt is the exploding crisis of the next generation and making them variable is setting people up for greater failure rather than making things better.

I understand this is a market forces issue and the cost of money should dictate the cost of the loan but if we can fixed rate thirty year mortgages then why can’t we have fixed rate student loans?

Under the Republican bill, rates for all Stafford loans, subsidized or not, would be set at that of the 10-year Treasury note, plus 2.5 percentage points, and capped at 8.5 percent. Initial rates this year would be forecast to settle at about 4.4 percent.

More information can be found here.


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Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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