Congress Extends 3.4% Interest Rate on Some Student Loans

U.S. House and Senate lawmakers voted to extend for a year the 3.4 percent interest rate for some federal student loans, two days before the rate would have doubled to 6.8 percent.

The measure, adopted as part of a transportation-spending bill, applies to subsidized Stafford federal loans, which are available to undergraduates, whose families demonstrate financial need.

Congress has been sparring over how to keep rates low as graduates struggle to find jobs in a sluggish economy and keep up with payments on their loans. Outstanding educational debt reached $1 trillion earlier this year, according to the Consumer Financial Protection Bureau. President Barack Obama has been pressuring lawmakers to extend the subsidized rate.

There are two types of Stafford loans for undergraduates. With subsidized loans, the government pays the interest while the student is in school and for a six-month grace period after graduation. There is no income requirement for unsubsidized loans, where students pay interest during college or else it accrues. The unsubsidized rate is 6.8 percent.

A subsidized rate increase would have affected more than 7.4 million students, who would accrue $1,000 more in debt for every year the rates aren’t amended, according to an April 23 White House press release.

The legislation amends the 1965 Higher Education Act. The rate for unsubsidized loans was 6.8 percent from July 1, 2006, through July 1, 2008, and has decreased since then. The 3.4 percent rate has been in place since July 1, 2011.

The subsidized loan rate would now be scheduled to double on July 1, 2013.

While holding the rate at 3.4 percent fixes the “urgent crisis now,” there is still a need for a long-term solution, Education Secretary Arne Duncan said in an interview with Bloomberg Television before the vote.

“As soon as we get this done, let’s start the next day,” Duncan said.

To contact the reporter on this story: Janet Lorin in New York jlorin@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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