Student loan interest rate to rise 2 points

Interest rates for student loans will increase nearly 2 percentage points July 1, meaning many student and parent borrowers will rush to consolidate loans this month.

The rate for all existing student Stafford loans will rise to 7.14 percent, up from the current rate of 5.3 percent, while interest for the Parent Loan for Undergraduate Students, or PLUS loan, will rise to 7.94 percent.

New Stafford loans issued after July 1 will carry a fixed rate of 6.8 percent, and new PLUS loans will be fixed at 8.5 percent. The rate increases are among the largest in the federal loan programs’ history.

With the average Oregon college student debt load nearing $18,000, the rate increase could cost student borrowers as much as $2,000 in additional interest payments over the course of paying off their loans. Three out of four Oregon undergraduates take out loans to pay for college, according to a Department of Education report last month.

Student borrowers may be able to avoid the increases by consolidating their loans before the July 1 increase. Most consolidation loans, which combine several types of federal education loans into one new loan, allow borrowers to lock in a fixed interest rate of about 5.3 percent.

The hike in interest rates strikes another blow to student borrowers, who have faced an increasing level of debt over the last decade.

“More students are going deeper into debt,” said Melissa Unger, executive director of the Oregon Student Association, a student lobbying organization. Increased borrowing for college affects the types of jobs students are able to pursue after graduation, and deters low-income students from attending college, Unger said.

To combat the rising level of debt, “More grants are needed, especially for low-income students,” Unger said.

Current Stafford and PLUS loan variable interest rates are determined each year by the three-month Treasury bill rate at the end of May. A Congressional budget bill signed by President Bush switched the interest rate for all new loans issued after July 1 to the new fixed rate. While the fixed loan interest rates are lower than the current variable rates, they have no possibility of lowering if economic forces weaken, as with variable rate loans.