Interest Rates Won't Increase on Subsidized Stafford Loans

Good news for student borrowers: Congress has passed a measure to preserve the 3.4% interest rate on subsidized Staffords, the federally sponsored loans available to students who qualify for financial aid. The rates were slated to double, to 6.8%, on July 1. It's a financial win for students, no question, but don't get out the party hats and confetti quite yet.

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First, the new legislation doesn't affect the vast majority of borrowers. Existing subsidized Staffords are unchanged, as are parent PLUS loans (federally sponsored loans for parents) and unsubsidized Staffords, which are already set at 6.8%. Unsubsidized Staffords for grad students also remain at 6.8%.

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The fortunate bunch -- the 7.4 million undergraduates poised to take out subsidized Stafford loans this year -- won’t suddenly be flush with cash. Students who use subsidized Staffords to borrow $5,500 (the maximum total amount for those loans) and then repay the debt over ten years will save less than $11 a month, says Mark Kantrowitz, of Finaid.org.

Some unfriendly changes to subsidized Stafford loans remain on the books, including making grad students ineligible for those loans and eliminating the six-month grace period before interest kicks in. Instead, interest will start accumulating as soon as borrowers graduate. (They will continue to have a six-month grace period before they have to start repayment, however.)

Still, the rate freeze has an added advantage, says Pauline Abernathy, of The Institute for College Access & Success. She points out that a lower interest rate will steer student borrowers away from private loans. "If the interest rate were to double, many students might think that a private loan with a lower variable rate is a better deal than a fixed federal loan," she says. (In fact, even Staffords carrying a 6.8% rate are better than private loans because the rate is guaranteed and the repayment terms are more flexible.)

For borrowing strategies, check out our tips for repaying student loans and advice for lightening the burden of loans.