Hey Kids! Will You Sell Your Vote for Two Pizzas?

Now that we have officially entered the political silly season, let’s take a look at that new political football known as Stafford Student Loans. You have probably heard that rates on such loans are scheduled to double from 3.4% to 6.8% effective July 1. As is the case with all things political, be careful of sound-bite news reports.

Here is the reality.

1.  The increase in the interest rate will apply only to loans issued between July 1, 2012 and June 30, 2013. Interest rates on previously issued loans will not change.

2.  The rate increase applies only to subsidized Stafford Loans. Rates on unsubsidized Stafford Loans will remain as they are now. Subsidized Stafford Loans are offered to those with financial need, as determined by a government-created black box formula that no sane person would try to understand except under duress.

3.  The much touted 3.4% subsidized rate has been in force for exactly one (1) academic year, from July 1, 2011 – June 30, 2012.

4.  Private student loans generally bear an interest rate of 12% because of high default rates. The government reports that 23% of subsidized Stafford Loans go into non-payment mode at some point.

5. The maximum subsidized loan (for 3rd, 4th, and 5th year dependent students) is $5,550 per year. If paid off over 10 years, the monthly payment increase is about $10 per month. The endless political haggling is over the price of two Little Caesar's cheese pizzas! (File this under "Why I Will Never Run for Public Office").

If you’re paying on a student loan, don’t panic. Your interest rate is not going up. Your payment is not going to double. Congress and the Administration are all over it. I HOPE you take that as good news.


Links:

Basic Facts on Stafford Loans

Effect of Increase in Rates on Payments

Default Rates