Without any action from Congress, interest rates for federal Stafford subsidized loans are set to double July 1, meaning that greater amounts of student debt will accrue if loans aren’t paid off quickly.

The College Cost Reduction and Access Act was passed in 2007 and decreased interest rates on those loans to 3.4 percent in 2011. Last year Congress passed a one-year extension at a reported cost of $6 billion. Now, interest rates for subsidized loans are on their way back up for the second year in a row.
If the interest rates of subsidized loans double to 6.8 percent, it will only apply to future students who borrow money. Those who have already borrowed subsidized loans at lower percentages will not see their interest rates increase.

For the 2012-2013 school year, more than 11,400 students at Grand Valley State University borrowed a total of $45 million in loans.

Michelle Rhodes, director of Financial Aid at GVSU, said loans are determined by factors like need, grade level, satisfactory academic progress and an overall eligibility, which involves staying under the maximum limit for each type of loan.

“In order to take out a subsidized loan, students must show some financial need since the subsidized loan is a need-based federal loan,” Rhodes said. “Typically, if a student is offered a variety of loans, they will always take the subsidized loan since it one of the best options.”
Unlike unsubsidized loans, the government pays interest on subsidized loans for as long as the student is enrolled in school, which means the loan won’t grow until after graduation.
Subsidized loans are limited to $3,500 for the freshmen year of school, $4,500 for the next year, $5,500 after that and a lifetime limit of $23,000.

Dependent undergraduate students who are still claimed by someone else on tax returns have a borrowing limit of $31,000 for both subsidized and unsubsidized loans. An independent undergraduate student can borrow up to $57,500.

Those maximum amounts are set to stay the same, and student borrowing most likely will not be deterred by the doubling interest rate of subsidized loans, said Jenna Poll, GVSU associate director of Financial Aid.

“The best advice is for students to really think about what they need to borrow each year,” Poll said. “Grand Valley has a very low student default rate compared to the national average, (and) if the interest rates were to double I do not think that will change or affect our default rate.”

Compared to other loans, the 3.4 percent interest rate on subsidized loans is relatively low. Unsubsidized loans aren’t limited to need-based students and already have an interest rate of 6.8 percent.

Perkins loans, which are awarded primarily by the university to students who demonstrate need, have an interest rate of 5 percent and a maximum borrowing limit of $27,500.

PLUS loans are available to graduate students, professional students and parents of undergraduate students with a 7.9 percent interest rate, and a borrowing limit that is capped at the cost of attendance in a given year.

Consolidation loans allow borrowers to bundle up other federal student loans into one. Interest rates differ for these types of loans, as they are based on weighted averages of the interest rates of the loans being consolidated, but are not to exceed 8.25 percent.

“We always encourage students to be smart borrowers and smart consumers,” Poll said. “We hope students are doing their homework and paying attention to the interest rates and only borrowing what they need to pay the bill.”