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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 2, 2013

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Congress failed to agree on a deal to keep subsidized Stafford federal student loan interest rates from doubling on July 1. As a result, interest rates have risen from 3.4 percent to 6.8 percent.

Stafford federal student loans are fixed-interest college financing that is only available to students who have filled out and submitted a Free Application for Federal Student Aid (FAFSA). There is only a limited amount of money available for Stafford college loans each year, hence the need for students to quickly fill out and submit FAFSAs once a year. 

Republicans supported a plan under in which interest rates would be tied to financial markets. The plan would have allegedly saved the government $3.7 billion over 10 years. Opposing Democrats allege that such a plan would only lead to student loan borrowers paying higher rates.

Democrats supported a bill that would have extended the 3.4 percent rate for an additional two years. Interestingly, the White House agreed with the Republican Party and supported locking in interest rates at the beginning of each year while tying interest rates to 10-year Treasury Bonds.

Regardless, Congress was on recess as the July 1, 2013 deadline passed, and neither plan was voted on agreed upon, resulting in the doubling of Stafford student loan interest rates.

Many financial industry observers see the government’s inaction as a direct blow to prospective student loan borrowers.

Dr. Michael Clifford, CEO and founder of, told that the government is acting like a monopolistic “predatory lender” that has all but pushed banks out of the student loan business. Clifford highlighted how restrictive student loans could be on top of the now doubled interest rates.

“There are no options other than to borrow from the government and they can’t be discharged out of bankruptcy,” he said. “The student loan business made a 15 percent return on investment. And it’s a very profitable business on the part of the government. It’s a very profitable form of taxation. It’s been sold to the public that it would cost less money for tax payers and is an efficient system when in fact it is very inefficient and it costs a lot more money.”

Clifford explained that even though student loan lenders get more money under the new higher interest rates, the money isn’t going to education. In Clifford’s eyes, the government runs student loan lending like a profitable business and doesn’t help academic institutions lower their costs. He suggested that student loan borrowers who graduate be offered a discount or rebate on their balance as both an incentive to finish their education and to help relieve student loan debt burdens.

One student loan borrower, Dr. Jane Foody, has a quarter of a million dollars of debt accrued from her doctorate of physical therapy studies. She said that while tuition keeps increasing each year, salaries for Physical Therapists and many professions have increased very little in the past 10 to 15 years.

She told that she borrowed one private student loan when she was 19 for $20,000 with an 11 percent interest rate. Not a single bank has agreed to consolidate or refinance her debt.

Dr. Foody feels that young adults shouldn’t be saddled with high interest rates.

“In today’s America and economy, many of us young adults are left working 50-60 hour work weeks with very little to show for it,” she said. “This is after we spent a decade studying and giving up fun and parties to do what we thought was the right thing for the promise of an American dream that is no longer there for the taking. A lie has been sold to many of us across this country being told we need to go to college and how college is very important.”

Dr. Foody attended an out-of-state school yet qualified for in-state tuition by working full-time and becoming a resident during her second year. However, she still needed to borrow student loans despite attending one of the most affordable physical therapy programs in the country, which cost her $70,000. On top of her already considerable debt, she then went to New York Medical College’s physical therapy graduate program which cost an additional $125,000.

People primarily go to college in order to make more money, claims Dr. Foody, however she questioned what the point of making more money was if student loan borrowers are destined to repay debts for the rest of their lives. She feels that many borrowers will never be able to pay off their loans before they retire, claiming that many of the brightest and most educated people in the country can barely pay their electric bills, much less put food on the table.

Debt stories like Dr. Foody’s personal account can instill fear and uncertainty into the hearts and minds of many upcoming college students and current college loan borrowers. But not everyone agrees that this is a time of such distress. Rather, prospective student loan borrowers may just have to be more careful with their expectations.

Hitha Prabhakar, personal finance advocate at, told that even though the media is filled with startup news about some young entrepreneur making billions without a college degree, borrowers should be more realistic in their expectations of the probability that they can become wealthy without an education. She also cautioned that forgoing a college degree because of costs can prove even more costly later in life.

“But that’s the thing — these are one-in-a-million type stories. Having a college education is invaluable, and with spending increasing geographically too … it would be in the best interest of American students to keep the price of student loans down,” she said. “Knowledge is power and power can equal higher pay, better opportunities and an edge in the global economy.”

Even though Congress may retroactively cooperate on lowering student loan interest rates, Financial Attorney Leslie Tayne of the Law Offices of Leslie H. Tayne P.C. predicts students will become more adaptive to their overall situation, with or without legislative interest rate help.

“This increase in interest may encourage more students to find other ways to fund their college education and be wiser about their choice in college.,” she said. 

Congress is currently in recess for the July 4 national holiday, but will be returning in the second week of the month. While lawmakers voted to extend the 3.4 interest rate cap last year, if Congress retroactively does so again this year, then the same situation may repeat itself in July, 2014.