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Congress Steps Up, Keeps Stafford Loan Rates at 3.4 percent

It came down to the wire, but Congress finally voted to help out millions of current and former college students who have accumulated up to $1 trillion in student loans.

Congress last week approved legislation to keep interest rates at 3.4 percent for new subsidized Stafford loans in the government’s Direct Stafford Loan program, funded by the U.S. Department of Education. The lower rate is effective for one year, until June 30, 2013.

Had Congress not acted, the rate would have doubled to 6.8 percent. The change saves an estimated 7.4 million students an additional $6 billion for the year on their subsidized Stafford loans.

Student Loan Debt, A Growing Problem

America’s overall student loan debt is escalating and is now estimated to be between $867 billion and $1 trillion, according to the Federal Reserve Bank of New York.

According to figures supplied by, a student loan-tracker, freshmen who borrow the maximum allowed loan amount of $3,500 for their first year of college, can save between $700 and $1,719, over the life of the loan, depending upon how it is repaid.

Sophomores who borrow the maximum amount of $4,500, can save between $900 and $2,211. Juniors and seniors who borrow the maximum $5,500, can save $1,100 to $2,702.

At the same time, other changes are expected to increase costs for some college students by an estimated $20 billion.

For example, students now entering graduate school will no longer be able to apply for subsidized federal direct loans.  Formerly, the federal government had paid the interest on these subsidized loans while graduate students were still in school and for six months after graduation.

That subsidy was eliminated during last year’s debt ceiling debate in Congress, in an effort to cover a shortfall in the funding of low-income student loans.

The change is expected to cost graduate student borrowers an additional $18 over the next decade, since the interest on their federal loans must now be paid while they are still in school and immediately after graduation. The interest rate on unsubsidized and all graduate Stafford loans is 6.8 percent.

Similarly, the government will no longer pay the interest on subsidized undergraduate loans during the six month grace period after students leave school. The added cost to those students is expected to be more than $2 billion per year. The change applies to new loans issued through July 2014.

Student Loan Debt Consolidation Program

Finally, a 2011 executive order issued by President Obama to allow borrowers to consolidate multiple loans into one direct government loan while effectively lowering the overall interest rate by as much as one half a percentage point, ended on June 30.

According to the U.S. Department of Education, only 440,000 of the 5.8 million eligible borrowers applied for the program before the cut-off date.

These students have loans totaling $10.6 billion. Borrowers who missed the deadline can still apply for the loan consolidation program, but are too late for the interest rate reduction.

For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000, and three percent, more than $100,000.

On July 1, several significant changes took effect in the federal government’s student loan programs that will decrease borrowing costs for some students while raising them for others.

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].

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