The United States Congress extended the 3.4-percent interest rate for subsidized federal student loans on June 29, just two days before the rate was set to double to 6.8 percent.
The measure will keep certain federal loans, which are awarded to undergraduate students based on financial need, in place through the 2012-13 school year. Both Democrats and Republicans have agreed the rate should remain low, but because the loans do not accrue interest during most of students’ undergraduate careers, the provision comes with a $6 billion price tag for the federal government.
According to Education Week, the government is expected to raise premiums on federal pension insurance to cover the cost. Additionally, Congress has limited loan eligibility to 150 percent of a program’s time to degree — six years for a bachelor’s degree and three years for an associate degree.
Students can take out up to $23,000 in subsidized loans over their undergraduate careers, depending on their year in school and financial aid eligibility. Unsubsidized loans, with an interest rate of 6.8 percent, are open to all students.
“It was critically important,” 2011 College graduate Colin Kavanaugh said about the subsidized loan he took out as an undergraduate. “Without having the loans, there’s no way that I could have possibly gone to Penn under any stretch of the imagination.”
Had the rate increased, only students taking out new loans would have been affected.
In Fiscal Year 2012, 2,084 Penn undergraduates took out subsidized loans, totaling over $7.5 million in borrowed money, said Sharon Pepe, senior director of credit services for Student Financial Services.
“While we do not wish to see any Penn student experience increased costs, we believe that the rate increase from 3.4 percent to 6.8 percent would have produced a modest impact,” Pepe said.
Pepe cited an expert who estimated students would only pay an additional $6 in monthly payments over the course of a loan under the higher interest rate. A White House press release estimated if the rate had increased, students would have accrued $1,000 each year in increased payments, according to a June 29 Bloomberg article.
The interest rate for subsidized loans was 6.8 percent until 2007, when House Democrats introduced the lower rate. The extension deal limits students to six years of undergraduate education without accruing interest on their loans, and beginning this month, graduate students will no longer be able to choose the subsidized option for new loans.
Kavanaugh said the rate increase for graduate loans could be a burden on those who choose to stay in school after receiving a bachelor’s degree.
“Every single factor that can be weighed by a student before taking on an enormous amount of loan debt will help make the decision easier,” he said. “I know a lot of people who are planning to go to law school who spent a lot of time trying to weigh every factor that might contribute to higher or lower interest rates. The interest rate compounding over time becomes a huge factor.”
Nearly a third of undergraduates across the country received subsidized federal loans in the 2010-2011 school year, up from 18 percent in 2000-2001, according to the College Board. Over 1,500 graduate students, who will now be restricted to unsubsidized loans, also took out subsidized loans in 2010-11.
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