Federal loans fall into two categories: subsidized and unsubsidized. Unsubsidized loans are available to those who do not qualify for other federal or private loans, and are aimed at people who are poorer, have no credit history or have limited personal or financial assets. Most borrowers have to pay a low monthly payment, and most are eligible for government-backed student loans with a 5 percent interest rate, if you are thinking of getting one, just make sure to use a student loan calculator before making a decision.
How are those low monthly payments made? The Federal Direct Consolidation Loan is an unsubsidized loan made by the Department of Education and typically available only to borrowers who earn income at or below 150 percent of the federal poverty level. In addition, there are federal and private loans with low interest rates.
“The fact that these types of loans are available to low- and middle-income students is a good thing because that helps make sure these students can afford higher education,” said Chris Hoxby, senior policy analyst at the Council of Independent Colleges and Universities.
However, the nonprofit group notes that the loan must be used to pay for a full-time program at a qualifying institution or college. Also, if there’s a financial hardship, borrowers must undergo a borrower-defense, whereby the Federal Student Aid Office takes legal action to prevent default on a Federal Direct Consolidation Loan.
The House Republican bill would affect only the second category, called subsidized Stafford loans, which make up more than 90 percent of federal student loans.
The House bill is not expected to receive any support from Democrats. If it gets through the Senate, the proposal would still be subject to a Senate debate, and Senate rules require 60 votes to advance the bill to final passage.
More than 17 million college students graduate from college each year, according to the National Center for Education Statistics, and for about a third of the roughly 17 million borrowers with private student loans, the rates are considered “subprime” or “subsidy.” In comparison, private student loans made by the Department of Education are considered “prime” or “good” quality.
It’s not clear how much money those borrowers would have to pay in higher interest rates. But a study from the Washington Center for Equitable Growth, which evaluates policy proposals, found that the House Republican bill would make higher interest rates.