You may have noticed that the news media have been sounding an alarm of sorts about a pending increase in the interest rate for some, but not all, federal student loans.
According to legislation already on the books, the interest rate on subsidized Stafford loans is scheduled to rise to 6.8 percent, effective July 1, 2013. That's twice the current rate of 3.4 percent. The rates on unsubsidized Stafford, Graduate PLUS, and Parent PLUS loans would remain at their current

levels, as shown in the accompanying table. Unless Congress enacts new legislation, the increase in the subsidized Stafford rate will automatically go into effect on July 1, at the start of the 2013-2014 financial aid award year.
Under the current subsidized Stafford loan program, borrowers are not charged any interest while they are enrolled at least half-time. There is no federal interest subsidy for unsubsidized Stafford, Graduate PLUS, and Parent PLUS loans. The U.S. Department of Education estimates that more than 8.9 million subsidized Stafford loans, totaling $28.6 billion, will be issued during the 2013 federal fiscal year, which began October 1, 2013; the average amount borrowed during this period is projected to be about $3,200.
A number of student advocates and policymakers are urging Congress to enact new legislation to avoid the rate hike. In addition, the FY2014 budget proposed by the Obama Administration last week calls for a market-based mechanism that would establish the interest rates for subsidized and unsubsidized Stafford loans, Grad PLUS loans, and Parent PLUS loans. Under this proposal, student loan rates would remain fixed, but rates would be set annually, based on the going rate for 10-year Treasury notes plus a margin.
According to 2014 Budget documents: “These [Stafford and PLUS] rates would be determined annually and fixed for the life of the loan. Under the proposal, new rates would be equal to the 10-year Treasury note rate with add-ons of 0.93 percentage points for subsidized Stafford loans, 2.93 percentage points for unsubsidized Stafford loans, and 3.93 percentage points for PLUS loans.” The accompanying table also shows what these proposed student loan rates would be on July 1, 2013, based on the current yield on 10-year Treasury securities (about 1.8%, according to data published by the Federal Reserve Board).
What’s more, the Administration’s proposal does not include a cap on interest rates. The rate on federal consolidation loans would continue to be a fixed rate based on the weighted-average rate of the loans being consolidated. However, the existing cap of 8.25 percent on new consolidation loans would be removed.
The President’s 2014 budget also proposes to extend the new Pay As You Earn repayment option to all student borrowers, effective July 1, 2014. Under this income-based plan, monthly payment amounts are limited to no more than 10 percent of the borrower’s discretionary income, and balances that remain after 20 years' worth of payments will be forgiven. The Pay As You Earn Plan is currently available only to relatively recent borrowers. Note: Pay As You Earn is not available for Parent PLUS loans or consolidation loans that included Parent PLUS loans, and the President's proposal would not alter this restriction.
Again, the President’s plan for changing student loan interest rates and expanding repayment options will require legislation, which is not yet in the works.
To estimate your student loan payments under current or future interest rates and under all of the available repayment options, including Pay As You Earn, check out the student loan repayment calculator offered at the USA Funds website.