TXEXplainer: The Federal Student Loan Rate Increase

By Rose Cahalan in Special on July 1, 2013 at 2:33 pm | 1 Comment

Today a Congressional impasse doubled the interest rate on a key federal student loan—unless the Senate can make a deal to restore the lower rates. What does the increase mean, and how will it affect Longhorns? We asked Tom Melecki, UT’s director of student financial services, to walk us through the changes. Here’s what you need to know:

The increase only affects undergraduates. Unless Congress acts, undergraduates receiving subsidized Stafford loans will see their interest rate jump from 3.4 percent to 6.8 percent. (Graduate students are already paying 6.8 percent.) And the change only impacts new loans, not existing ones: “This only affects those subsidized loans dispersed to students starting today or later,” Melecki says. Nationwide, about 7 million students are expected to take out new subsidized loans this year.

The change may not be permanent. The interest rate increased because Republican and Democratic senators in Washington couldn’t agree on a plan before they adjourned for their Independence Day holiday. It’s unclear whether they’ll be able to make a deal later this summer. In a press conference White House spokesman Matt Lehrich said that the Senate will work to solve the problem. “We are confident they will get there,” Lehrich said, “and that the solution will include retroactive protection for students who borrow after July 1st so that their student loan rates don’t double.”

About 13,000 UT students may be affected. According to Melecki, 13,393 UT undergraduates borrowed $55.4 million in Stafford loans in the 2012-13 school year. Those students won’t see the rate increase, but students taking out new loans will. “Students from low-income families will be hit the hardest,” Melecki says, “because most students who get this loan wouldn’t be able to attend college otherwise.”

On average, students affected will pay about $2,600 more. Melecki and his team expect that for a UT student graduating in four years and paying off the loan over the recommended 10-year period, the interest rate increase will total $2,600. “We recommend that students borrow as little as possible no matter what,” Melecki stresses, “but the specter of an extra $2,600 over 10 years shouldn’t scare anyone away. This is still one of the best loans around, because the government doesn’t allow the interest to build up until after you finish school.”

Photo by StockMonkeys.com on Flickr.

Tags: congress, financial aid, Stafford loans, student debt, Tom Melecki, TXEXplainer