Student loan interest rate doubles

The interest rate on federal Stafford student loans doubled to 6.8% after Congress failed to extend the current rate of 3.4% before the July 1st deadline.

The Obama administration estimated the interest rate hike will cost students on average $1,000 more, adding to the debt burden of the 7.2 million students who rely on federal loans to help them pay for college.

“I am deeply disappointed that Congress failed to take action to prevent student loan interest rates from doubling from 3.4% to 6.8% by the July 1st deadline,” Rep. Steny Hoyer (D-Md.) said in a written statement. “I hope that when Congress returns from the July 4th district work period, we can work together on a bipartisan solution to keep rates low.”

Federal subsidized loans allow undergraduate students with financial needs to borrow up to $23,000 with low interests that don’t accrue while they are enrolled in school.

But raising the interest rate from 3.4% to 6.8% increases the cost of borrowing. The higher cost of borrowing could discourage future students from attending college or preventing them from completing their degree, which could, in turn, lead to lower earnings for those individuals, according to the non-partisan Congressional Budget Office.

Furthermore, the CBO pointed out that higher student loan interest rates “could strain the borrowers’ ability to make other financial commitments, such as buying a home” in the future since a larger share of his or her incomes will be devoted to paying the loan interests.

However, CBO noted that raising the interest rates may force some students to “pay closer attention to the economic value” of their college education and shorten the time they’ll take to complete their degrees.

The CBO estimated that $28 billion in subsidized student loans will be originated this year, accounting for 26% of all federal student loans.

Eliminating subsidized student loans would save the federal government an estimated $49 billion over the next 10 years. But it will cost taxpayers $41 billion from 2013-2023 if Congress votes to keep the subsidized loan interest rate at 3.4% during that period. Another option is to maintain the 3.4% rate but to restrict eligibility for federal subsidized student loans to only students who qualify for Pell Grants; this option would cost just $1 billion over the next decade.

Given the well-documented long-term economic and societal benefits of a well-educated workforce, some students argued that Congress should be focusing on making college education more affordable instead of trying to reduce the deficit on the backs of American students.

“If you can’t rely on aid or scholarships, then you have to turn to student loans since it’s the only other resource you can use. So if the interest rate is high, they’re going to have to take it. It shouldn’t be put on them to fix the deficit,” Joshua Watson, a student at Arizona State University, told the National Education Association. “How do we expect our youth to grow in the economy if they are burdened with a high interest rate loan that will not allow for them to buy a home, car or even start a business? It’s time to start thinking of the future of education, and it starts with making it affordable for all who want it.”

Types of federal student loans:


  • accounts for 26% of federal student loans
  • available to undergraduate students with financial need
  • lifetime borrowing limit of $23,000
  • interests don’t accrue while borrower is enrolled in school
  • interest rate increased from 3.4% to 6.8% on July 1, 2013


  • accounts for 56% of federal student loans
  • available to undergraduate, graduate, and professional degree students regardless of financial need
  • borrowing limit of $31,000 for dependent undergraduate student; $57,500 for independent undergraduate student; $138,500 for graduate and professional degree student
  • interests do accrue while borrower is enrolled in school
  • 6.8% interest rate


  • accounts for 18% of federal student loans
  • available to graduate and professional degree students and parents of dependent undergraduate students regardless of financial need
  • interests accrue while enrolled in school
  • 7.9% interest rate


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