As of July 1, the direct subsidized student loan interest rate went from 3.4 percent to 6.8 percent. Congress failed to act on a new interest rate formula before the deadline and for now, students borrowing from the federal government are paying the price. This new rate only affects loans taken out after July 1, and is still only required to be paid back after the borrowers undergraduate career ends.
Whether or not the increased rate is an unbearable burden for students is determined by each student’s financial situation. The Consumer Finance Protection Bureau laid out exactly what the rate increase means for borrowers.
If one accumulates $10,000 worth of direct subsidized loans (taken out after July 1), average monthly payments after the grace period would increase by $16.66. This results in an increase of payments by $199.92 annually.
Calculations are based on a standard 10-year repayment plan for the subsidized loans:
The Congressional Budget Office estimates $28 billion worth of direct subsidized student loans will be taken out in 2014, with approximately 9.4 million loans.
The CBO addressed the question of profits the government makes off student loans. For every dollar lent for subsidized loans in the 2013 fiscal year, the government will receive $1.14 back. Unsubsidized loans will bring back $1.40 for every dollar lent.
Despite all the daunting facts behind student loan interest rates and overall debt, experts still determine that college and the burden of loans make economic sense. The Public Policy Institute of California conducted a study in June, and found the increase in wages from having a college education more than makes up for the average loan burden a student takes on.
Direct subsidized loans are still a relatively attractive option for students because of repayment options, most of which are income-based. Private loans may offer lower interest rates, but payment options may not be as forgiving.
Even if the situation of increased student loan interest rates is bearable for students, it doesn’t excuse Congress’ inability to compromise and find a solution. Overall student debt in the US has exceeded $1 trillion, interest rate increases will accelerate its rise.
For more on student loan debt, check out previous coverage: