A new federal loan interest rate went into effect on Monday, doubling from the previous rate of 3.4% to 6.8%.
In 2007, the College Cost Reduction and Access Act sought to lower rates on subsidized Stafford Loans for four years. After the four years were up, Congress extended the 3.4% for another year. This year, lawmakers didn’t act fast enough to come to a decision before the July 1st deadline before they went off for a 10-day July 4th break, which meant the rates automatically reverted back to 6.8%.
Despite a lot of media coverage on the new rate, it actually only affects one type of federal loan. The direct subsidized loan is the only federal loan whose rate is doubling to 6.8%. This loan is a very particular loan, in which the government pays the interest on the loan when the borrower is still in school, during the six-month grace period after he/she leaves school, and while the loan is in deferment if the borrower needs to defer payments.
Because this is one of the more lenient and cost-effective loan options, there’s a cap on how much a student can borrow. Other federal loans -- direct unsubsidized loans, Perkins loans, and PLUS loans -- maintain their previous rates and are not affected by the interest hike.
Furthermore, the rate change only affects new loans that are disbursed after July 1, 2013. This doesn’t affect those whose subsidized loans were disbursed prior, and it won’t affect your monthly payments or interest rates if you are currently repaying those loans, for example.
Those who are taking out loans after July 1st don’t have to take any immediate steps, as their payments will only be affected down the line after the borrower graduates or drops below half-time status. For example, if you’re a freshman and you took out a subsidized Stafford loan, the 6.8% interest rate will kick in around 2018 after your grace period is over. If you have to defer repayment, it might not kick in until even later.
In the meantime, when the government congregates again after their July break, there is a chance that rates will be reverted back to the 3.4% and they can retroactively apply this rate to loans that were already disbursed on or after July 1st. According to CNBC, “Congress could make a change to lower interest rates... but a retroactive change would only apply to those loans that have not yet been disbursed by the U.S. Department of Education.”
For a summary of the federal student loan amounts and terms, check out this document compiled by the Project On Student Debt.
Amy He is a staff writer and reporter at MyBankTracker.com, where she covers the intersection of money, banking, and culture. MyBankTracker is an independent resource that helps consumers make smarter banking and money decisions.