FAQ: Student loan interest rate increase

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by Mary Ellen Flannery, Miguel Gonzalez and Nancy O’Brien

Everything you ever wanted to know about student-loan interest rates!

  • Q: Why is everybody talking about student-loan interest rates these days?

A: Because the clock is ticking on low-interest federal student loans. Since 2007, thanks to the 2007 College Cost Reduction and Access Act, interest rates on a specific type of student loan have been held to 3.4 percent. Without action by Congress, those rates will double to 6.8 percent on July 1.

  • Q: What kind of loans are these?

A: We’re talking about federally subsidized Stafford loans, which are fixed-rate loans for low- or middle-income college students. They can be used to pay tuition and other school expenses. Other kinds of federal student loans, including unsubsidized Stafford loans and Stafford loans for graduate students, already come with a higher interest rate.

  • Q: Who would be affected by the interest rate doubling?

A: Interest rates on existing subsidized Stafford loans would not be affected. Only new borrowers, who take out subsidized Stafford loans on or after July 1, would be affected by the new interest rate.

  • Q: Is a difference of 3 percentage points really a big deal?

A: Yes! It really is a big deal. If the rates are allowed to double, the average borrower would pay an additional $1,000 over the life of the loan – and the average college graduate in this country already owes $25,000. Consider Megan Brown, a special education major at Peru State College in Nebraska, who is studying full-time to “earn a more stable and brighter future for (myself) and my daughter, and also have the skills and knowledge to positively contribute to society and my community,” she said. “If the rates on loans are increased, I am not sure how I will be able to finish my degree.”

  • Q: So it’s a big deal for Megan Brown. Why is it also a big deal for Barack Obama?

A: This isn’t just about any one person’s future, although it is true that college graduates earn more money, are more likely to own a house, and less likely to be unemployed. It’s also about the health of the country. “In the long run, the most important thing we can do for our economy is to give all of you and all Americans the best education possible,” President Obama told students at a Virginia high school this month. “That means giving more Americans the chance to learn the skills that businesses are looking for right now. And in the 21st century, it also means higher education cannot by a luxury—it is an economic imperative that every American should be able to afford.”

  • Q: So what’s the answer?

A: The answer is a bill, the “Stop the Student Loan Interest Rate Hike of 2012,” co-sponsored by Sen. Sherrod Brown (D-OH), Sen. Jack Reed (D-RI), and Sen. Tom Harkin (D-IA). Two weeks ago, it was stopped from progressing in the Senate when not a single Republican Senator voted for its consideration. That bill is coming back and it needs to be passed.

  • Q: What can I do?

A: Lots! Tell Congress to act now to prevent the doubling of student loan interest rates.

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