More Details About Federally Funded Student Loans

As interest rates for subsidized Stafford loans (i.e. interest is withheld throughout college) is poised to increase from 3.4% to 6.8% as of July 1, 2013, Congress is considering to postpone the increase, as happened in 2012.  (BTW, unsubsidized Stafford loans, where interest begins accruing from the date promissory note is signed, is already 6.8%.)

At the same time:

According to the C.B.O. [Congressional Budget Office] report, the government will get 12.5 cents in revenue next year for every dollar lent through subsidized Staffords [student loans], 33.3 cents per dollar in unsubsidized Staffords, 54.8 cents on each dollar of graduate school loans, and 49 cents per dollar of parent loans, for a total of $34 billion a year.  (New York Times, April 8, 2013)

The Federal Department of Education makes a profit from the difference of the low borrowing costs for the government minus the fixed interest rates charged to student loan borrowers.  While Federal Stafford Loans may be less challenging to be awarded than a private loan, potential borrowers may want to “shop” interest rates of different loans (i.e. home equity lines of credit or other personal loans) to limit her/his borrowing costs and total amount owed in the future.

For more information, see No Free Lunch: A Student Loan Borrower’s Tale