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What the Stafford Loan Interest Rate Hike Means for Students

Kelsey Sheehy

Student loan interest rates doubled on Monday, jumping from 3.4 to 6.8 percent, but it will be at least a year before borrowers feel the impact.

That's because the rate hike only applies to new loans -- specifically new subsidized Stafford loans -- taken out by undergraduates on or after July 1.

Incoming college freshmen borrowing for the fall semester will not be repaying those loans until six months after they leave school. For those who don't drop out, that is another four, five or even six years down the road. Seniors graduating in December won't feel the pinch until this time next year.

"It's not really a big deal. It's not the end of the world," says financial aid expert Mark Kantrowitz, publisher of Edvisors.com.

[Discover loan repayment tips for college dropouts.]

While doubling the interest rate sounds dramatic, the increase will amount to less than $20 per month for the average borrower, he says.

A state-by-state breakdown from the Center for American Progress, a left-leaning nonprofit think tank in Washington, D.C., shows what borrowers would save if Congress had extended the lower rates another year.

In California, where an estimated 550,900 students borrow Stafford loans, maintaining the 3.4 percent would save the average borrower $987 per year. That per-borrower savings is just shy of $900 in Texas, which has roughly 464,100 Stafford loan borrowers, according to the reports.

Not everyone is convinced that the higher rates will have minimal impact.

Danielle Beers, a student at the University of North Carolina--Wilmington, vented via Twitter.

As if my student loans were not causing me enough stress, I know have to pay DOUBLE the interest rate...THANK YOU CONGRESS..SO MUCH LOVE

-- Danielle Beers (@daniellebeers) July 2, 2013

Beers was one of many students airing frustrations over the student loan interest rate increase on Twitter.

"It is appalling that Congress let rates double for student loans. You should be ashamed of yourselves for letting it happen" @IllyKay, who describes himself as "Just another 20-something with a bachelor's degree, in debt and underpaid," tweeted at his senator, Bill Nelson, D-Fla.

[Find tips and tools to help pay for college.]

David Grow, chief financial officer at Western Governors University, estimates as many as 40,000 students at his university could feel the hit of this rate increase.

"I don't think they quite understand what the impact will be," he says, adding that incoming freshmen are particularly vulnerable. "I think it will weigh heavy on them as they're just beginning their education."

Despite the outrage, the new 6.8 percent rate is still a good deal for students, especially since holding rates at 3.4 percent for another year cost the government roughly $6 billion, says Kantrowitz, from Edvisors.com.

"That would be $6 billion less for Pell Grants or for some other priority," he says.

This is not the first time student borrowers have paid nearly 7 percent interest on Stafford loans. Rates fluctuated between 3.37 and 8.25 percent, with the latter being the cap, from 1994 until 2007. Those interest rates varied for students in school versus in repayment.

At the height of the recession, Congress opted to give students some relief, gradually dropping interest rates on subsidized Stafford loans issued to undergraduate students. This move brought rates down from 6 percent in the 2008-2009 fiscal year to 5.6 percent in 2009-2010, then 4.5 percent in 2010-2011 and 3.4 percent in 2011-2012, according to FinAid.com.

The respite was intended to be temporary, but was extended last year amid a heated presidential campaign. Absent that political pressure, the extension expired, effective July 1.

Because the interest rate reduction was slated to expire, students taking out Stafford loans for the upcoming school year were already notified of the higher rate, says Sara Harrington, assistant director of academic progress and loans at the University of Iowa.

"Many of our students that plan on borrowing a loan for the '13-14 school year coming up have already signed their loan documents," which listed the 6.8 percent rate, she says. "The entrance counseling would have told them about the interest rate because this has been the plan for several years now."

Most lawmakers agreed that allowing interest rates to double overnight was not a smart path. What they could not agree on was an alternative.

While the economy is rebounding, students are still struggling, and allowing the interest rate increase to stand will only further burden recent college graduates, according to Rep. Debbie Wasserman Schultz, D-Fla.

"As our economy continues to recover, the seven million students who rely on these loans to finance their education shouldn't face higher debt as they graduate, start a career or buy a house at a time when interest rates are at historic lows," the congresswoman wrote in a recent op-ed to U.S. News.

[Learn how congressional budget proposals could affect student loans.]

Proposals backed by both Democrats and Republicans are currently circling the halls of Congress. Most of those plans dictate market-based interest rates, which fluctuate similar to home and car loans, but vary on more technical details.

Some speculate that both houses could reach a consensus when they return to work on July 10, making the agreement retroactive. That prospect seems unlikely to Kantrowitz.

"Last I heard they were very far apart," he says. "I think the most likely scenario is it stays at 6.8 percent."

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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