President Barack Obama's State of the Union speech may be causing anxiety for families with college-bound students. In addressing the rapidly rising cost of higher education, Obama noted that the fixed interest rates on student loans are set to double in July if Congress fails to act.
There are primarily two types of federal student loans: subsidized and unsubsidized. The difference is that the government doesn't start charging interest on subsidized loans until the student graduates. But with unsubsidized loans, interest starts accruing right away. That can tack a considerable amount on to the initial loan amount by the time the student graduates and starts paying off the debt.
Borrowers also pay a different interest rate when they graduate. Unsubsidized loans now charge a fixed interest rate of 6.8percent. Over the past few years, the interest rate on subsidized loans was lowered to its current level of a fixed 3.4 percent. The reduction was the result of legislation passed before the financial crisis that was intended to reduce the cost of college. But the law established the 3.4 percent rate only through this July. So unless Congress extends the reduction, the rate on unsubsidized loans goes back to 6.8 percent.
A little less than half of all undergraduate students have a subsidized federal loan, according to Mark Kantrowitz, publisher of Finaid.org, which tracks the student loan industry.