Student Loan Interest Rate Is Set to Double: How You Can Prepare

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Drowning in debt
Alamy
After having dealt with at least one big part of the so-called "fiscal cliff" -- the broad tax increases that would have taken effect this year -- and having failed to stop another -- the sequester -- the government now faces yet another economic cliff event, this time affecting student-loan borrowers.

Without government action, rates on subsidized student loans will double as of July 1, putting further pressure on students who already face the uncertain prospects of whether they'll be able to get jobs to pay off their loans after they graduate.

Why Student-Loan Debt Is a Big Problem

Student-loan debt has become an increasingly troublesome financial burden not just on recent graduates but on the entire U.S. economy.

Student-loan balances outstanding passed up other popular types of debt such as auto loans and credit-card debt back in 2010, with the Federal Reserve Bank of New York reporting that total student loan debt was just shy of the $1 trillion mark as of the first quarter of 2013.

Even worse, while overall indebtedness in most areas, including home mortgages, has declined in the years since the financial crisis, student-loan debt has steadily risen, now standing 50 percent above its levels from just four years ago, according to the New York Fed.

Before you panic about your existing loan balances, though, it's important to understand that the debate over the future of student-loan interest rates doesn't affect loans made before the July 1 deadline. For those loans, whatever interest rates were in place when you got your loan -- such as the 3.4 percent rate that applied to loans for the 2012-2013 school year -- won't change.

Déjà Vu All Over Again

If this debate sounds familiar, it's because students went through the same crisis last year. In the end, the government simply agreed to extend the 3.4 percent rate for a year and put off making a bigger policy decision until now.

Various lawmakers and President Obama have come up with a wide range of competing proposals.
The president's proposal would reduce rates on both subsidized and unsubsidized loans, with roughly 3 percent rates for subsidized and 5 percent for unsubsidized loans being linked in future years to the yield on 10-year Treasuries, with a markup of 0.93 percentage points for subsidized and 2.93 percentage points for unsubsidized loans. The link to Treasuries means that rates could rise for students taking future loans, although each loan would be locked in with rates as of the year it was taken.

A competing GOP proposal from the House of Representatives would also base rates on Treasuries, with a 2.5-percentage-point markup on Treasury yields equating to a rate of roughly 4.5 percent based on current yields. Moreover, under the House's plan, the interest rate on student's loans wouldn't be set until after they graduate, introducing new uncertainty to the borrowing process.

Competing Senate plans take similar tacks but have different effects. Senate Republicans would use a 3-percentage-point markup versus Treasuries, while Senate Democrats would like to tie loan rates to the lower 3-month Treasury rate. In addition, various individual lawmakers have proposed temporary fixes, including Sen. Elizabeth Warren's (D-Mass.) proposal to set the 2013-2014 rate at 0.75 percent.

Planning for the Future

At this point, students have limited options to try to protect themselves against a potential rate hike.

Unlike homeowners, who have rushed to refinance their mortgages in recent years to take advantage of low rates, there's no viable way to accelerate borrowing on student loans without resorting to private loans, which already carry much higher interest rates than even the most draconian of the Washington proposals covering federal student loans.

The better solution is to focus on what you can control -- because while interest rates are out of your hands, there are a host of things you can do to reduce the cost of college.

Taking steps to reduce expenses beyond required tuition and fees can go a long way toward cutting your eventual financial-aid bill. By acting now to explore alternatives like cheaper room-and-board or other housing options, you might be better able to make ends meet. And

The most important lesson that the current controversy underscores is the need for parents to do everything they can to avoid having to rely on government loans in the first place. Boosting your own college savings -- whether through a 529 plan or one of the alternatives -- will leave you less dependent on the ever-changing political landscape in Washington, as well as leaving your children far better prepared to enter adulthood on a sound financial footing after they graduate.

To learn more about federal student loans, visit the U.S. Department of Education's Federal Student Aid Office here.


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67 Comments

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boowah

But Congress has no problem voting 33 times on repealing Obamacare, do they? Too bad student loans aren't a political issue.

June 10 2013 at 10:58 AM Report abuse -1 rate up rate down Reply
ebernotus

Suck it up kids...you voted for this administration,

June 10 2013 at 9:42 AM Report abuse rate up rate down Reply
1 reply to ebernotus's comment
mixrbear

thye have no one to thank but the GOP.

June 10 2013 at 12:11 PM Report abuse -1 rate up rate down Reply
thefacts22

Our Schools are anyways graduating morons,most of them end up as janitors and waiters....The liberal/socialits infected teachers have been in control for decades.....We do not need any more "liberal/political scientists"

June 10 2013 at 9:34 AM Report abuse +3 rate up rate down Reply
Jim

What do you expect when the government takes control of something?

June 10 2013 at 9:25 AM Report abuse +3 rate up rate down Reply
1 reply to Jim's comment
thefacts22

El Presidente School Grades are sealed,under court orders WHY?

June 10 2013 at 9:36 AM Report abuse +2 rate up rate down Reply
ectullis

Another BHOzo legacy

June 10 2013 at 9:15 AM Report abuse +3 rate up rate down Reply
Jaci

when michelle obama visited UNI , our local college, she told the students there in her speech that their student loans would all be paid by the government. It was a promise. And then she asked them to all go vote early because they had the polls right there. Needless to say, they were duped.

June 10 2013 at 7:56 AM Report abuse +3 rate up rate down Reply
2 replies to Jaci's comment
ectullis

Just think students that easily duped will be taking over in the near future . Sad very sad.

June 10 2013 at 9:17 AM Report abuse +3 rate up rate down Reply
thefacts22

It is called CORRUPTION.....In Venezuela,the Socialist/Marxist Regime PROMISED 366.000 houses for the poor within 1 years after elections...after 7 months less than 30.000 badly constructed shacks have been delivered.....some without sanitary facilities...that is our future

June 10 2013 at 9:42 AM Report abuse +1 rate up rate down Reply
vallontina

We will have an entire generation who can't afford to buy a house or even rent an apartment. Basically, they'll be living with their parents until their huge debt is paid off. If my mortgage interest rate is 3.75%, I don't understand why a student loan has to be 11% or higher.

June 10 2013 at 7:13 AM Report abuse +1 rate up rate down Reply
1 reply to vallontina's comment
rexjohnvii

intrest rates are higher because they expect that a good percentage of the loans made will never be paid back so what they do to recover the loss is to charge the people that will pay it back higher interest rates . credit card companys have been doing it for years. so the only losers here are the ones that are willing to pay there bills while the slouches walk away with asmile on there face and a paid in full deploma.

June 10 2013 at 9:39 AM Report abuse rate up rate down Reply
bandy4321

You borrow money......you pay if off!! Plain and simple.

June 10 2013 at 3:58 AM Report abuse rate up rate down Reply
2 replies to bandy4321's comment
vallontina

Yes of course they know they have to pay them back. But why PUNISH students who are trying to get a higher education to get better jobs with interest rates that are triple what people have for their mortgages, home equity loans or car loans?

June 10 2013 at 7:16 AM Report abuse +1 rate up rate down Reply
thefacts22

Obazombies voters do not pay for anything.......they want everything for free......the prophet promised

June 10 2013 at 9:44 AM Report abuse +3 rate up rate down Reply
Kathy Kelley

Guess someone has to pay for the ridiculously low interest rates our government, especially the Republicans give to the banks! Why not...the middle class pays for everything else! After all, we don't get all those tax breaks and loop holes you give your pals in big business or on Wall Street. Thanks for once again showing your true colors and forcontinuing to kick middle America while they are still down! You guys rock...NOT!!!!!

June 09 2013 at 11:18 PM Report abuse -1 rate up rate down Reply
2 replies to Kathy Kelley's comment
nad22551

neither the republican party nor the democratic party sets the rates-complain to the federal reserve and the treasury secretary

June 10 2013 at 7:34 AM Report abuse rate up rate down Reply
rexjohnvii

kathy, i can see that you don't have a clue. the dumocrats have pulled the wool over your eyes once again. if you get a financial record of all the dumocrats in washington yoou'll see that everyone of them are multi millionares. and that the hollywood elite that's backing them are also. stop listening to them and check things out for yoourself. if you do i.m sure it won't take you long to switch over.

June 10 2013 at 9:48 AM Report abuse +1 rate up rate down Reply
kayo1025

What? Our gifted students didn't know that this was written into Obamacare to help pay for it? So much for Obama's education, or rather re-education, programs.

June 09 2013 at 7:58 PM Report abuse +1 rate up rate down Reply
1 reply to kayo1025's comment
vallontina

I thought the ridiculously high premiums I am paying for my health insurance was courtesy of Obamacare.

June 10 2013 at 7:16 AM Report abuse rate up rate down Reply