When the interest rate for a key type of federal student loan doubled on July 1, how did that affect borrowers?
There are several ways to answer that. One is to look at the difference in payments for a student who borrows the maximum possible through the subsidized Stafford loan program. The subsidy means that those loans, for students with demonstrated financial need, don’t accrue interest while the borrower is in school. Before July 1, the rate was 3.4 percent. Now it is 6.8 percent. Congress is debating possible changes.
Here’s how the numbers stack up, with credit for help from education policy analyst Clare McCann of the New America Foundation, using a repayment calculator on an Education Department Web site.
The most a dependent undergraduate student can borrow via these types of loans is $23,000.
At 3.4 percent, assuming a standard 10-year repayment plan, that student has a $226.36 monthly payment. That would mean, over the lifetime of the loans, paying $4,163.40 in interest.
At 6.8 percent, assuming the same terms, the student has a monthly payment of $264.68. Total interest paid would be $8,762.17.
The monthly difference: $38.32.
The total difference: $4,598.77.
It’s also important to remember that dollars paid 10 years from now will be worth less than dollars paid today because of inflation.
Students take out new loans each year. Assume our hypothetical maxed-out borrower is in college four years. The net difference, per loan, per year, for this student is about $1,150 in interest. The typical student, however, might borrow significantly less than the maximum.