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A Primer on the Doubling of the Subsidized Stafford Loan Interest Rate

Mark Kantrowitz

April 24, 2012

Who is Affected?

7.4 million undergraduate students will receive subsidized Stafford loans in 2012-13.

The interest rate increase affects only new loans made on or after July 1, 2012. The rate increase does not affect previous loans, which keep their existing interest rates.

Only undergraduate students are affected. The interest rates on Stafford loans to graduate and professional students have remained unchanged at 6.8% since the switch to fixed rates on July 1, 2006. Also, the Budget Control Act of 2011 ended subsidized Stafford loans to graduate and professional students effective July 1, 2012. Graduate and professional students will still be able to borrow the same amount of money, but the loans will be entirely unsubsidized.

Eligibility for subsidized Stafford loans is based on financial need. Financial need is defined as the difference between the total cost of attendance (COA) and the expected family contribution (EFC). Thus even high-income students may qualify for a subsidized Stafford loan if they enroll at a more expensive college. For example, more than a quarter (27.4%) of undergraduate students with family income of $100,000 or more received subsidized Stafford loans at colleges costing $30,000 or more in 2007-08, compared with only 3.4% at colleges costing less than $10,000. More than two-fifths (43.6%) of high-income students who received subsidized Stafford loans were enrolled at the most expensive colleges.

Based on data from the 2007-08 National Postsecondary Student Aid Study (NPSAS), 54.8% of subsidized Stafford loans were awarded to Pell Grant recipients and 45.2% to students who did not qualify for the Pell Grant. Students who qualified for the Pell Grant were three times as likely to receive a subsidized Stafford loan (59.6% vs. 18.5%). More than two-thirds (69.7%) of subsidized Stafford loan borrowers had family income under $50,000, compared with a quarter (24.2%) of students with family income of $50,000 to $100,000 and 6.1% of students with family income of $100,000 or more. (The Pell Grant program is better-targeted at financial need, with 95.9% of Pell Grant recipients having family income under $50,000.) Half (49.8%) of subsidized Stafford loans were awarded to undergraduate students at public colleges, a quarter (22.3%) to undergraduate students at non-profit colleges and a quarter (27.8%) to undergraduate students at for-profit colleges. A fifth (21.2%) of undergraduate subsidized Stafford loan borrowers attend colleges that cost less than $10,000, two-fifths (41.2%) attend colleges that cost $10,000 to $20,000, a fifth (19.8%) attend colleges that cost $20,000 to $30,000 and a fifth (17.9%) attend colleges that cost $30,000 or more.

What is the Difference Between Subsidized and Unsubsidized Loans?

The government pays the interest on a subsidized loan during deferment periods, such as the in-school deferment or the economic hardship deferment.

The government may also pay the interest on a subsidized loan during the grace period after graduation. For example, the government pays the interest during the in-school period and 9-month grace period on Perkins loans. Previously the government would pay the interest on subsidized Stafford loans during the 6-month grace period in addition to the in-school period. However, the government will not pay the interest on subsidized Stafford loans during the 6-month grace period for new loans made in 2012-13 and 2013-14.

The government does not pay the interest on unsubsidized loans during deferment periods and the grace period. If the interest is unpaid as it accrues, the interest will be capitalized, adding it to the loan balance. This increases the size of the loan (typically by about 1/6th), leading the borrower to pay interest on interest.


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