Interest Rates Rise on Student Loans

Students who rely on federally-subsidized Stafford loans are being told to consolidate their loans before steep interest rate hikes go into effect tomorrow.

On July 1, interest rates on Stafford loans—the principal form of federal student loans—will rise from 5.3 percent to 6.8 percent for new loans and 7.14 percent for outstanding loans. This marks one of the single largest rate increases in the program’s 41-year history.

Though Stafford loans are used more by students at Harvard’s graduate and professional schools than by its undergraduates, over 9 million people—students and former students of all sorts—currently have outstanding loans.

Over the past several weeks, the interest rate hikes—which were put into place by the 2005 budget resolution—have drawn fire from Democratic lawmakers.

“Student debt is like quicksand—it swallows you up before you have a chance to gain your footing,” Sen. Charles E. Schumer ’71, D-N.Y., told The Northwest Indiana Times yesterday. “Graduating from college should kick start a young person’s professional life, but massive debt will just bog you down for decades.”

But Craig Orfield, a Republican spokesman for the Senate Health, Education, Labor and Pensions Committee, defended the increases to the Times by pointing out that Congress has actually increased student loan funding, from $52 billion in 2004 to $62 billion this year. He argued that the increases in interest rates were necessary to reduce the federal budget deficit.

Sen. Edward M. Kennedy ’54-’56, D-Mass., urged students to consolidate their loans in a statement last month, even as he lamented the hikes. The ranking Democrat on the Health, Education, Labor, and Pensions Committee, Kennedy also released a report earlier this week with the committee’s other Democrats showing that tuition has risen faster than federal education grants. He introduced a bill on Wednesday that would reduce interest rates on student loans and increase need-based grants.

“Congress must do more to reduce interest rates and expand benefits for students and families in order to make college more affordable for all Americans,” Kennedy said. “In the meantime, I urge students to lock in today’s lower rates by consolidating their student loans before July 1st.”

—Staff writer Paras D. Bhayani can be reached at pbhayani@fas.harvard.edu.