Student Loan Interest Rates Will Increase on Monday

Congress headed home this evening for the Fourth of July recess without implementing legislation to prevent an increase in the interest rate on federally subsidized students loans. As a result, interest rates will double for students on Monday from 3.4% to 6.8% on new subsidized Stafford loans.

Over the last year, Congress has been working on efforts to prevent what will now take place on Monday.

The Obama administration and Congressional Republicans supported a long-term change to how interest rates are determined for all federal student loans. Those plans differed in the particulars, but both would have tied interest rates to market rates, allowing them to rise without a cap as interest rates go up in the broader economy. Congressional Democrats pushed for a one- or two-year extension of the current 3.4 percent interest rate for subsidized student loans, arguing that the issue should be settled when Congress debates broader higher education legislation in the coming years.

It appeared earlier this week that a bipartisan compromise proposal might be the way to go. However the proposal could not garner sufficient bipartisan support in the Senate and its fate in the House remained uncertain.

Whether students will actually pay the new rate is unclear. On Thursday, Senator Tom Harkin, the Iowa Democrat who chairs the education committee, said that he wanted a one-year fix that would apply retroactively. Since the federal government is the lender for all new student loans, Congress could adjust interest rates after the fact. But where the money will come to pay for the extension, which last year cost $6 billion, is an open question.

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