UHERO 101.5: Much Ado about Student Loans

Kimberly Burnett, Blogs

By Kimberly Burnett and James Jones

How will college students around the country be affected by the latest policy change regarding interest rates on student loans? Rates on subsidized Stafford loans, which account for about 25% of all federal student loans, increased from 3.4% to 6.8% for new loans beginning this week. How big of a blow is this to future borrowers? To get an idea of the magnitude of this policy change, we calculated the increased monthly payment and total interest payment on the maximum subsidized Stafford loan amount of $23,000. Keep in mind that the higher rates apply only to subsidized Stafford loans. In 2011 the average borrower graduated with approximately $27,000 in student loans.

Under the new interest rate of 6.8%, a student taking out the maximum Stafford loan would now face a monthly payment of $265, a $38 monthly increase from the old policy. Over ten years, the student would be burdened with a total interest payment of $8,760, approximately $4,600 more than the total interest payment under the old rules. The extent to which the increased interest rate on subsidized Stafford loans will affect college-bound students will depend on their success in the job market following college and their subsequent ability to pay back the loan in a timely fashion.