Federal Student Loan interest rates set to double this July

April 23, 2012 by LendKey Staff

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The eyes of student loan borrowers around the country are on Washington, as the Obama administration begins a political push to keep rates on Subsidized Stafford loans from doubling to 6.8% on July 1, 2012. Nearly 8 million students already take Subsidized Stafford loans each year, and have come to rely on them for a low cost tuition payment option.


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Subsidized Stafford loans offer students a lower cost to borrow for college expenses. Students may qualify for this loan after filing the Free Application for Federal Student aid (FAFSA) to determine financial need. The subsidized Stafford loan offers an interest subsidy, where any interest that accrues on the loan while the student is in school is paid for by the government. After graduation, the rate can remain at a low fixed rate, currently at 3.4%.

A recent NYTimes article outlined some of the politics swirling around this issue during an election year. Obama does not go without some criticism, as continuing to offer student subsidies is seen as a way to generate more youth votes for 2012.

The low 3.4% on Subsidized Stafford loans was made available by the passing of the 2007 College Cost Reduction and Access Act, but is now on schedule to expire. There was a much higher interest rate environment during that time, with the Prime rate ranging from 7.25% to 8.25% during 2006-2007. This made the low locked in rate a financial life-saver, however it comes with a cost.

It’s estimated that this Stafford loan subsidy would cost another $6 Billion to extend into the next academic year. With limited resources available on capitol hill, politicians are treading carefully as they proceed. The White House is going after a media blitz to raise awareness about the issue with college students. Conservative opponents point out that continuing this subsidy will mean adding even greater tax burdens to citizens, and that they should allow the rates to increase accordingly.

With an estimated $860 Billion to $1 Trillion in student loans outstanding, one wonders how much more student loans can be subsidized by the government. With some 80% of all student loans outstanding being federally backed, taxpayers are ultimately on the hook for any of their defaults and delinquencies, along with interest payment subsidies. This is a high visibility issue on capitol hill during an election year, especially with younger Americans very concerned about how they can afford college. No doubt this issue will continue to build momentum until a decision is finally made.

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