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Explainer: Changes to federal student loan interest rates

Updated on August 13, 2013

We’ve received questions from consumers about the changes in federal student loan interest rates that are scheduled to take effect on July 1. We’ve answered some of these questions below.

Will changes in federal student loan interest rates impact me?

For the vast majority of borrowers currently on the hook for over $1 trillion in student loan debt, the answer is no. Existing loans are not impacted. Existing borrowers can learn more about their options by using our Repay Student Debt tool and Ask CFPB.

However, for undergraduates taking out Direct Subsidized Loans, there will be some changes. The Congressional Budget Office estimates that there will be approximately 9.4 million Direct Subsidized Loans made in 2014, with a total value of over $28 billion. Currently, there are roughly 39 million borrowers with federal student loans. Here’s a comparison of some terms between this month and next month:

Key terms of Direct Subsidized Loans

Subsidized loan debt after grace period Today July 1
Interest rate while in school 0 percent 0 percent
Interest rate after school 3.4 percent 6.8 percent
Loan limit per year $3,500 to $5,500 $3,500 to $5,500

As of last July, graduate and professional students cannot take out new subsidized loans, so this change won’t affect non-undergraduates. Again, this does not impact rates in loans you already took out or loans that aren’t based on financial need, like the Direct Unsubsidized Loan.

Loans under the new interest rate structure continue to have 0 percent interest while in school. Here’s how it might impact your approximate monthly payments on the standard ten-year repayment schedule:

Subsidized loan debt after grace period Payment under existing rate Payment under new rate Increase in annual interest cost
$5,000 $49.21 $57.54 $99.96
$10,000 $98.42 $115.08 $199.92
$15,000 $147.63 $172.62 $299.88
$20,000 $196.84 $230.16 $399.84

Many of you have asked about the various proposals from lawmakers that might change the future interest rate structure for federal student loans. If rates change to a variable structure, this may make it more challenging for families to use the existing version of our Paying for College tools to estimate monthly student loan payments. We’ll be monitoring these proposals closely and will be asking for your feedback on how to adjust the tool should these proposals become law.

Is it true the government makes a profit on student loans?

The Congressional Budget Office regularly releases projections on the costs of various loan programs. The latest calculations show that in fiscal year 2013, for every $1 lent to new borrowers, Direct Subsidized Loans are expected to bring in $1.14 in revenue, and Direct Unsubsidized Loans will bring in $1.40 in revenue. Of course, these are just estimates. For example, if borrowers have access to attractive refinance options to take advantage of historically low interest rates, these revenues would go down.

It’s worth noting that the Congressional Budget Office calculates these estimates in a way that may not include all of the operating costs of administering the loan program, so it can’t be exactly compared to the way a bank might account for its profits and losses.

What should I do if rates double?

Given that the in-school rate is still 0 percent, a Direct Subsidized Loan is still likely the best option if you qualify. Since almost all private student loans accrue interest while you’re in school, you’d need to find an equivalent fixed rate option of less than 4 percent if you want your payments to be the same or less compared to the Direct Subsidized Loan.

Even if you are able to find that rate, you’d miss out on some important benefits, like Income-Based Repayment and 0 percent interest if you went back to school.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To find out more information about the CFPB’s work for students and young Americans, visit


Updated on August 13, 2013:
Last week, the president signed legislation passed by Congress to adjust federal student loan interest rates for this academic year. Here’s what the new rates look like:

Loans Interest rates
Direct Subsidized and Unsubsidized Loans (for undergraduate students): Fixed at 3.86%
Direct Unsubsidized Loans (for graduate/professional students): Fixed at 5.41%
Direct PLUS Loans (for parents and graduate/professional students): Fixed at 6.41%

The rate for Perkins Loans (for undergraduate and graduate/professional students) remains fixed at 5%.

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