The July Hike in Student Loan Interest Rates Explained

Interest rates on subsidized Stafford Loans are set to double July 1, 2013.

June 3, 2013, 1:48 PM

June 3, 2013— -- You've heard vague mentions of interest rates doubling on some student loans and it makes your stomach drop, right? But it also makes you want to stick your fingers in your ears and ignore the fact that paying for college is something you're going to have to think about.

We totally get it (from very personal experience), but we also know from experience that denial doesn't work.

So here are the basics on those pesky Stafford loan interest rates that are set to spike at the beginning of July in easy-to-read bullet points. Seriously, it will take you less than five minutes.

What: Only interest rates on subsidized Stafford Loans will be impacted by the July change. Subsidized Stafford Loans are need-based loans for undergraduate students only. The loans don't accumulate interest while students are in college. Need is determined by the Free Application for Federal Student Aid (FAFSA) form, which applicants can fill out at no cost. You can find more information about the application and deadlines (they vary by state and college) here.

When: Interest rates on subsidized Stafford Loans issued after July 1, 2013 are set to double to 6.8 percent. Loans issued before this date will come with 3.4 percent interest, which is locked in for the life of the loan. That means that where a student with a $10,000 subsidized Stafford loan would accrue about $.93 in interest each day at the current rate, that will jump to $1.86 in interest each day when the higher rate takes effect.

Why: The 6.8 percent rate is actually the old interest rate for these loans. Congress passed a law back in 2007 that gradually lowered interest rates to 3.4 percent over five years, but allowed the rate to rise back to 6.8 percent in 2012. Everyone - President Obama, Republicans, Democrats - wanted to avoid that rebound, but couldn't agree on how to do it. So they passed a stopgap measure that extended the 3.4 percet interest rate for a year. But that year is almost up and we're at a familiar situation: everyone wants to prevent interest rates from rising uniformly to 6.8 percent, but they can't agree on how to get there.

Who: A bunch of political players have proposed possible solutions. Here are a few of the main ones.

- President Obama: Obama wants student loan interest rates to vary from year to year depending on market conditions. Interest rates for subsidized loans would be tied to the yield on 10-year Treasury bonds (plus .93 percentage points). Basically that means interest rates could initially be even lower than 3.4 percent, but they could rise much higher in coming years. The good part, though, is that while rates would vary by year, they'd be locked in over the life of every loan.

- Democrats: Some Democrats want to extend the current 3.4 percent interest rate for a year or two to give Congress a chance to reform the law that deals with federal student loans. That law is set to expire at the end of this year. But that plan doesn't appeal to all Democrats. Senator Elizabeth Warren recently proposed that interest rates match the rate the Federal Reserve charges banks: .75 percent.

- Republicans: Some Republicans have also called for varying interest rates based on the market. House Republicans recently passed such a bill. Like Obama's plan, the interest rates on Stafford loans would be tied to the yield on 10-year Treasury bonds (plus 2.5 percentage points). Unlike Obama's plan, the Republican plan would not offer better rates for subsidized loans than unsubsidized loans. Also unlike the president's proposal, the rate would not be locked in over the life of the loan. It would vary, although it could be fixed after graduation. The Republican plan does cap how high interest rates could go, however, to 8.5 percent for Stafford loans. Senate Republicans have called for a plan that would also vary with the market, but lock in rates over the life of each loan. Like Obama's plan, Senate Republicans also don't offer a cap on rates.

So what does this mean for you?

Right now, we're in a bit of a wait-and-see holding pattern.The president has lambasted the House Republican bill and the parties remain far apart on the issue. The extension came down to the wire last year, and it's looking like this year will be similar.

We can't say for sure what will happen. But it's still worth filling out the FAFSA form if you haven't already, and looking into your loan options. Regardless of what happens to interest rates, federal subsidized loans typically have much lower rates and far more flexibility in terms of forgiveness and consolidation than loans from private companies.

And don't get discouraged. Even the leader of the free world had to contend with student loans. President and First Lady Obama finished paying off their own student loans nine years ago.

Also, we completely support rewarding yourself with a party when you do finally pay off those loans. We know we'll probably all be in senior assisted living facilities by then, but the Fusion digital team has already planned out some bingo ragers to celebrate. Bring the prune juice and we'll let you join in the fun!

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