Congress Fails To Prevent Student Loan Rates From Doubling On July 1

Congress has decided to leave the issue of student loans on the back burner while it takes a recess next week for July 4th. This means that effective July 1, interest rates on subsidized Stafford loans will double from 3.4 percent to 6.8 percent.

A group of bipartisan senators had begun negotiations last week to formulate a plan that would have included a three-tier system for undergraduate, graduate, and PLUS loans with rates tied to the 10-year Treasury note. But on Thursday, Senate Democrats rejected the plan in favor of their own. Senators said it did not include adequate protections for students, such as a cap on interest rates. They say the doubling of rates on July 1 is temporary because any plan enacted can retroactively revert rates.

The plan proposed by Senate Democrats would extend the rates for subsidized Stafford loans for two years, which would cost $8.3 billion. The costs would be offset by closing tax loopholes.

Other plans had also been floated. President Obama’s plan included tying rates to the 10-year Treasury note and locking in the rate for the life of the loan. It, however, did not include a cap.


House Republicans’ plan tied rates to the 10-year Treasury note and added 2.5 percent, which would have created additional revenue to pay down the deficit. It also included a high cap of 8.5 percent or 10.5 percent for PLUS loans. The plan did not include a fixed rate and would have allowed rates to fluctuate with the market, which could end up costly. This plan passed the House in May but wasn’t favorable to Democrats who said that the revenue generated should not go to paying down the deficit on the backs of students.

After the failure to take action, 7 million students who take out subsidized Stafford loans will now be faced with a 6.8 percent interest rate, which is estimated to cost an average borrower an additional $2,600 over a decade.

The issue of student loans is one that reaches further depths than just rates. Student debt totaled over $1 trillion in 2012. In the first quarter alone of 2013, outstanding student debt came to $986 billion and two out of five borrowers are expected to fall behind on payments. Furthermore, 57 percent of all borrowers worry that they won’t be able to repay their loans.

The burden to repay this debt is hampering the housing recovery and the slow-to-recover economy is forcing students to take jobs that they’re overqualified for.