How Does the Increase in Student Loan Rates Affect You?

by Scott Sery on July 8, 2013

Student Loan InterestYou have probably seen the news lately about how the student interest loan rate doubled at the beginning of the month.  With all the coverage, there is bound to be some misinformation, and before panicking, make sure you understand just how it will affect you.  Politicians and the media like to play things up for ratings and to make the “other guy” look bad.  There is a lot more to the increase than interest rates simply doubling.

It is true that the loan rate has increased from 3.4% to 6.8%, and the arguments for and against the increase are all good ones.  However, this increase only applies to new loans.  Any money that was borrowed before July 1st will retain the lower rate.  Likewise the rate does not apply to all new loans.  The increase only affects subsidized Stafford loans; the loans that have interest payments waived while the student is in school.  Other loans are still available at the lower rate.  Even at nearly 7%, these loans are quite a good deal.

Have you tried to get a loan recently?  Did you notice that the lender is requiring a lot more information to finish the paperwork than they did just a few years ago?  Banks have tightened their belts and are doing a much more thorough job of checking up on borrowers before they simply hand out money.  And one of the biggest thing holding borrowers back is low credit, or no credit.  Students, very often, do not have a credit score.  So put yourself in a lender’s shoes.  Would you want to loan money to someone that has no credit, so that they might attain a degree that could possibly help them land a better job in order that they may pay off the loan?  Most likely you would not.  The government is lending money to very high risk borrowers, and a very reasonable interest rate given the circumstances.

One of the biggest arguments against the increase in the interest rate is that students may be discouraged and choose not to attend college.  But the truth is that most people who borrow money to get an education will finish their degree and get a good paying job out of it.  And even if they do fall into hard times, the government already has quite a few provisions set up for repaying the loans (such as loan forgiveness, capping repayments at 10% of disposable income, and some others).  Charging more for the loan upfront for those who should not have a problem repaying them down the road and then adjusting them afterwards if people are struggling makes more sense than assuming everyone will be struggling.

Interest rates have been rising everywhere recently, not just for student loans.  And in order to get the government back to a healthy financial state, politicians have to cut spending and increase revenue.  Increasing the student loan rates is just one of the ways they are doing so.  If you already have student loans, you are not affected by this increase.  If you are planning to take out student loans, remember that you are still getting a good deal, and your degree will help you earn the extra money needed in order to pay back those loans.

How do you feel about the student loan increase?  Will it help or hurt the economy?

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development
DC @ Young Adult Money July 8, 2013 at 6:17 pm

I think supply and demand (the market) should really set interest rates versus the Federal Reserve. I understand that Congress has some say in student loans, but I don’t think they should. You can always argue that it “helps the economy” to keep the rates low.

Sean @ One Smart Dollar July 8, 2013 at 8:38 pm

I completely agree.

Scott Sery July 9, 2013 at 10:20 am

This is actually something both parties want. Instead of setting an arbitrary rate, let it be tied to the current interest rates (like all other loans out there). Your guess is as good as mine as to why that won’t pass.

Ree Klein July 9, 2013 at 7:08 am

Hi Scott,

The rate is one thing, but the point you bring up that I find most important is the fact that students are high-risk borrowers. You can’t get a mortgage or auto loan without good credit AND a proven income source. Why would any lender, at any interest rate, give a student a loan if they can’t prove their ability to repay? Talk about predatory…

Add on to that that it’s very unlikely that you can get these debts forgiven and now you’ve trapped people into loans they stupidly signed up for.

The federal reserve says that student loan debt is eclipsed only by mortgage debt in this country.

So, rate aside, it needs to be far more difficult to get these loans than it is today and getting a cosigner to back up the deal is a bad idea too. That puts too many older folks at risk.

Sorry, I have strong opinions about this topic!

Your Daily Finance July 9, 2013 at 12:26 pm

I dont like the fact that the rates were double even though they are for new borrowers and wont bother my loans. The problem is that we need to be more educated about the loans so that student don’t get in this kind of debt in the first place. Its crazy like Ree mentioned and as did you that its hard to get a car or home loan without credit and documents but these they just allow you to sign your life away with no problems.

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