Rates on New Stafford Loans Double

Students borrowing certain need-based Federal loans after July 1, 2013 will pay a higher interest rate than previous borrowers paid on the same loan. Rates on new Direct Subsidized Loans, a need-based loan otherwise known as Stafford loans, will be 6.8% versus the 3.4% rate that student loan borrowers have enjoyed for the previous six years.

The government estimates that 9.4 million loans will be made this year with the new interest rate.

The rates for current Stafford are not affected and will remain at 3.4%. Direct Unsubsidized Loans, which aren’t based on financial need, rates are already at 6.8% and aren’t affected by the rate increase. Rates on PLUS loans, credit-based loans for parents of students in college, also remain the same.

Subsidized loans are those that do not accrue interest while the borrower is still enrolled in school. Unsubsidized loans, on the other hand, will accrue interest even while the borrower is enrolled in school. The result is that the loan balance at graduation will be higher than the original amount borrowed, unless interest payments were made. Private student loans are typically unsubsidized.

Even though loan rates doubled on Stafford loans, monthly payments are only slightly higher than under previous interest rate. For example, the monthly payment on a $5,000 student loan at 3.4% APR is $49.21 while it’s just more than $8 higher at the doubled interest rate 6.8%. The payment difference is small, but it affects low- and middle-income students, as the borrowers who qualify for Stafford loans

There may still be time to save borrowers from the higher loan rates – if Congress makes a change to the rates before students sign their loan documents in the fall. Proposals have been made to tie rates to a market rates like the U.S. Treasury note or the Fed Rate.

What does all this mean?

Your current Federal loan rates (taken out before July 1, 2013) remain the same.
If you take out a subsidized Stafford loan after July 1, 2013, your interest rate will be 6.8%.

Despite the rate increase, subsidized Stafford loans are typically a better choice than private student loans. You won’t accrue interest as long as you’re enrolled at least half-time and long-term you'll generally pay less interest on the Federal loans.

Source: ConsumerFinance.gov