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Why the Student Debt Crisis Could Worsen This Year

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Your interest rates for subsidized Direct student loans could increase this year. In 2008, a law was enacted to temporarily reduce interest rates on these loans from 6.8% to 3.4%. However, on July 1st, this bill is set to expire. Without further action from the government, increased interest rates could end up creating thousands of dollars in additional payments for students—particularly students in great financial need.

To understand the issue at hand, one needs to better understand how student loan interest rates function today. With the Direct loan (also commonly referred to as the Stafford loan), all dependent students in pursuit of an undergraduate degree may obtain $5,500 during their freshman year, $6,500 during their sophomore year, and $7,500 in each of their junior and senior years.

You don’t need to take on excessive debt to send your child to college.

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There are two types of Direct loans: the subsidized and the unsubsidized.

Subsidized Direct loans have two distinct advantages over the unsubsidized rates:

  1. No interest accrues on the subsidized rate until 6 months after graduating from college.
  2. When rates begin to accrue, they do so at a lower rate of 3.4%.

Unsubsidized Direct loans, on the other hand, do not have these benefits. Instead, they have two distinct disadvantages:

  1. The standard unsubsidized portion of the loan accrues interest immediately—meaning the amount students have to repay will be much higher.
  2. Interest rates are 6.8% for unsubsidized loans. This is double the percentage of the subsidized Direct loan.

Students who have demonstrated need—based on the federal methodology—are able to obtain the more attractive loan, the subsidized Direct loan. However, if Congress and the President do not come to an agreement by July 1, 2013, all Direct loans will be subject to unsubsidized rates—theoretically removing the subsidized component from the Direct loan.

Ultimately, it is time to govern! For young adults trying to make their way in life, student debt is a huge challenge. These young adults do not need this already incredibly challenging element of the college process to be made even more difficult by this political battle. If you agree, there’s plenty of opportunity to get involved. Call your congressperson and tell them simply: solve this student loan interest rate crisis, and solve it now!

To learn more about your loan options and how you can avoid taking on excessive debt, check out Right College, Right Price in the College Countdown Bookstore.

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Frank Palmasani is a Chicago area high school guidance counselor and former college director of admissions, and creator of Financial Fit. In 1985, Palmasani began delivering seminars on the college financial aid and planning process, and estimates that he has reached more than 200,000 people through his talks. He is a member of NACAC, IACAC, and the College Board. Palmasani has been featured in the Boston Herald, the Chicago Tribune, Yahoo! Finance, WGN-TV, WTTW-TV, CBS’s Monsters and Money in the Morning, and is the author of the forthcoming book Right College, Right Price (Sourcebooks, January 2013).

Palmasani is the founder of Financial Fit, which you can find in the College Countdown bookstore.