Over the past month, you may have heard about the impending subsidized student loan interest rate increase, as politicians frantically work to come to a consensus before July 1. Right now, subsidized student loans interest rates currently stand at 3.4%, but will increase to 6.8% unless a new bill is passed by July 1.

With this decision having a major impact on your future, it is important to stay up to date with the issue and the suggested solutions.

1. Default Solution: Increase to 6.8%

As stated above, if politicians fail to come to an agreement, the interest rate for subsidized loans will increase to 6.8%.

2. Democratic Solution: Student Loan Affordability Act

Most Democrats in the House of Representatives argued for a two-year extension on the 3.4% interest rate, which would maintain the current interest rate and bring the question to Congress again in two years. However, this bill was rejected in the Senate on earlier this month.

3. Senator Elizabeth Warren’s Solution: Student Loan Fairness Act

Senator Warren proposed a bill which would dramatically cut the interest rate on subsidized loans. Citing the fact that the student loan debt now exceeds $1 trillion, Warren proposed cutting the interest rate to 0.75%, which is the same rate that banks are able to get from the government. For more information, please see our recent article on the details of Warren’s bill.
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With the recent legislation involving the subsidized student loan interest rate, many have begun to express concern towards the fact that if Congress is not able to reach an agreement by July 1, subsidized Stafford loan interest rates will automatically increase from 3.4% to 6.8%.  In the process, many news sources have erroneously been reporting that this increased interest rate would yield an additional $1,000 in annual debt for the average borrower. However, this figure is much lower in reality.

Using the loan repayment calculator from Finaid.org, we can begin to calculate more-accurate rates (though still estimates). Assuming a student borrows $23,000 over the course of four years—the maximum amount that can be taken out for undergraduate studies—the annual increase will be less than half of what has been reported.
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As you may recall, last year, Congress voted on whether to raise the subsidized Stafford loan interest rate to 6.8%, or keep it at 3.4%.  Congress decided to prolong the decision for another year and keep the subsidized interest rate at 3.4%.  However, a year has gone by, and it is once again time for Congress to vote.  If Congress fails to come to a consensus by July 1, the interest rate on subsidized loans will automatically double to 6.8%.

In response to this impending decision, several politicians have put forth ideas of what they deem to be the best solution.  On May 1, Senator Elizabeth Warren proposed the Bank on Students Loan Fairness Act, which sought to lower the interest rate on subsidized loans to just under 1%, which she described as the equivalent rate for which banks qualify.
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Last year at this time, the big issue in the news was the impending doubling of student loan interest rates. The interest rates of Subsidized Stafford Loans were set to double from 3.4% to 6.8%. Before this could happen, Congress stepped in, temporarily lowering them for another full year.

That extra year of low rates is now coming to a close, and rates are once again set to double. This is why Senator Elizabeth Warren has introduced the Bank on Students Loan Fairness Act. This act would allow students to borrow at the same rate as banks, which is about “one-ninth the amount that students are asked to pay”.

Here is a quick list of what this bill seeks to do:

• The bill would charge students a rate equal to the rates banks are getting from the government (for subsidized loans only)—a rate of less than 1%.
• Loans would be funded through the federal reserve, with administration by the Department of Education

Senator Warren gives an excellent overview in her introduction of the bill to the Senate Committee. Watch it below.

Families everywhere are currently sweating over financial aid award letters, trying to decipher aid and make the huge decision about which school is the right choice for both the student, and family finances. However, once the college decision is made, there is still a lot to do, including applying for student loans!

To help families through this award letter season, here is a breakdown of how and when to accept—or apply for—all types of student loans.

Perkins and Stafford Loans

When to Accept: April-May for Fall semester
How: For these loans, students can simply accept their loan amounts through the financial aid office. To finalize the acceptance and before they can receive the loan funds, students must complete a Master Promissory Note (MPN) online at StudentLoans.gov and complete an entrance counseling session as directed by the school.
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2012 Interest Rate Increase

Last year around this same time, a hot story in the media was the impending interest rate increase for Federal Direct Stafford Loans. Subsidized loans were at 3.4%, and with legislation running out, were set to double to 6.8% — the same as their unsubsidized counterparts. Luckily for students, Congress extended the lower interest rate for another year.

Projected Rates for 2013–2014

Once again, subsidized student loan interest rates are facing an impending increase, and are still up in the air. Without action, students may see an increase to 6.8% for the 2013–2014 academic year. This means that the only difference between subsidized loans and unsubsidized student loans would be that the former will not accrue interest while in school or in a grace period.

At this time it is unclear what actions may be taken to prevent student loan interest increases. We could see another one-year extension of the lower rate, or a system overhaul may even be possible. However, if nothing is done by July 1, 2013, students can expect to see the higher rate take effect for all new subsidized loans.

The Future of Federal Student Loan Rates

Private student loan rates are currently based on an index rate (such as the Prime or LIBOR indeces) plus a set margin. This allows for flexibility based on the current market. Federal student loan rates do not follow this structure, and are not tied to any economic factors, making it difficult to set competitive and affordable rates for borrowers.

To rectify this, organizations such as the New America Foundation have submitted proposals for better ways to handle federal loan interest rates. The proposals include tying interest rates to 10-year treasury notes and securities. Rates would be determined similarly to private student loans, with a variable base, plus a proposed margin of 3.0%.

While it is unclear which, if any, of these proposals will be enacted, it’s possible that borrowers could see more affordable rates in the near future.

For more information on interest rate proposals, read Solving the Interest Rate Quandary: Two Feasible Proposals on NASFAA.org.

You can refinance your mortgage, but can you refinance your student loans? The short answer is: possibly. Let me elaborate.

Refinancing is a tool commonly used by borrowers in the housing industry to lower interest rates. In regards to student loans, refinancing options are not widely available and depend on the type of loan you have.

Consolidating Federal Student Loans

Federal student loans (such as Stafford Loans) are not able to be refinanced but they can be consolidated. For federal loans, you must consolidate them through a Federal Direct Consolidation Loan which determines your new interest rate as a weighted average. Unfortunately, weighted averages do nothing to lower your rate.

However, there are still some benefits to consolidating your loans, such as:

• It lowers your monthly payment by extending the term of the loan
• It makes managing your repayment easier by combing multiple federal loans into one

Probably not the answer you were hoping for, but consolidation can be helpful to those struggling with high monthly payments.
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As you may have heard by now, the recent sequestration has huge implications for education across the board, and Higher Ed. is no exception. The budget cuts that took effect on March 1, 2013 will affect most types of federal student aid, including Federal Work Study (FWS), Federal Supplemental Education Opportunity Grants (FSEOG), Service Grants, TEACH Grants, and the Direct Student Loan Program. Fortunately for many students, Pell Grants were specifically exempt from the budget cuts.

Here’s a brief overview of what to expect from student aid programs going forward:

Federal Work Study and FSEOG Programs

Budget cuts of $86 million do not only mean a reduction in the FSEOG program, it could also mean a loss of on-campus employment for as many as 33,000 students if colleges do not step in with funding. While these campus-based programs are funded through the remainder of this year, program cuts will take affect for the 2013-2014 academic year.

Iraq – Afghanistan Service and TEACH Grants

For both of these federal grants, funding has been reduced for any award first disbursed during the sequester. It should have no impact on grants first disbursed before the cuts took effect.
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Every year we get the same question, so here is your answer:

For the 2013–2014 year, the FAFSA will be green, with a purple section for parents.

For the current year, 2012–2013 the FAFSA is orange.

In previous years:

• 2011–2012 FAFSA was Yellow
• 2010–2011 FAFSA was Blue

For detailed information on completing the FAFSA, visit FAFSAonline.

You may have heard of Stafford loans, PLUS loans, and private student loans, but do you really know the differences between them? Is one type of loan really better than the other? Let’s find out.

Subsidized Stafford Loans: The Best of the Best

Subsidized Stafford loans are the best type of student loan, and should be taken out before any other type. Stafford loans carry a 3.4% fixed interest rate, and the federal government will cover your interest payments until graduation. Interest will start to accrue after graduation, but you will not be required to make your first payment until 6 months after graduation. As an undergraduate, you can take out a maximum of $23,000 in subsidized Stafford loans in your lifetime.

Unsubsidized Stafford Loans: The Next Best Thing

Unsubsidized Stafford loans are federal loans that have 6.8% fixed interest rate. Contrary to their subsidized counterpart, interest accrues for unsubsidized Stafford loans while you are enrolled in school. However, similar to subsidized Stafford loans, your first monthly payment will not be due until 6 months after graduation. In addition, unsubsidized Stafford loans are also need based, and not impacted by your credit score. As a dependent, undergraduate student, you can take out a maximum of $8,000 for undergraduate studies. Unsubsidized Stafford loan limits vary based on your education status.
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