Sorry, Students: Higher Loan Rate May Still Be Best Option

Kelly Binns, 19, does school work while housesitting in Denver, Colo. Binns is already worried about how she will pay back her student loans when she graduates in 2016.
Dana Romanoff | NBC News
Kelly Binns, 19, does school work while housesitting in Denver, Colo. Binns is already worried about how she will pay back her student loans when she graduates in 2016.

Students scrambling to find an alternative to government-subsidized student loans that recently got a lot pricier may not want to waste too much time on the effort.

Even at the higher interest rate that recently kicked in, a subsidized Stafford loan is still one of the best deals around, experts say.

"If that person looks for a loan on the private market, they're often not going to find anything close," said Heather Jarvis, an attorney and student loan expert.

The Senate failed again Wednesday to strike a compromise to temporarily keep the rates on the loans from doubling to 6.8 percent. Some lawmakers are pushing for a long-term plan that would tie student-loan rates more closely to market rates. That could potentially save the government money.

(Read More: What New Student Loan Rates Mean for You)

Unless a deal is reached, students taking out new loans will pay the higher interest rate.

That has left students, such as Kelly Binns, in a difficult spot.

Binns, 19, is relying on student loans, a small scholarship, help from her parents and income from a summer nanny job to finance her degree in history from Colorado Mesa University in Grand Junction, Colo. She also is completing a concentration in secondary education and hopes to be a teacher.

Binns used subsidized Stafford loans last year and plans to use them again this year, despite the rate increase.

Though she doesn't want to pay more, she's also finding it tough to snare any more scholarship money, and her student aid office has advised her that adding private student loans might not make financial sense.

(Read More: A Weak Economy Means Fewer Babies)

Binns hopes she can find a job during the school year to help offset the high cost of getting an education.

"It kind of was a shock to me, how much college is costing now," she said.

Many students and their parents have suffered sticker shock at the costs associated with getting a four-year degree. As the price tag for college has risen, student loan debt has ballooned to about $1 trillion by some estimates.

Government-subsidized Stafford loans have been among the more popular options for the people need them. About 31 percent of undergraduate students relied on them to pay for at least part of their education in the 2011-12 academic year, according to the College Board.

The loans are awarded only to students with demonstrated financial need, which is determined based on factors that include how much money your family can contribute. About two-thirds of those loan recipients (or their families) had adjusted gross income of less than $50,000 a year in 2008, according to an analysis of the latest available data by Mark Kantrowitz, publisher of, a network of websites about planning for college

The interest rate on those loans gradually decreased from 6.8 percent in 2008 to 3.4 percent last year, before jumping back up to the 2008 level this week.

But experts say the loans still could be pretty reasonable, particularly when compared with what else is out there.

"Despite the doubling of the interest rate, it's still a very good deal," Kantrowitz said.

(Read More: Student Debt Stalemate Will Hammer Undergrads)

He pointed out that government-subsidized loans come with a substantial perk: Students are not charged interest while they are in school or during deferment periods. That's not necessarily true for unsubsidized or private loans.

The higher interest rate also is 1 percentage point lower than the Direct PLUS loans that the government offers parents. And subsidized Stafford loans are awarded at a fixed rate, meaning students don't have to worry about paying more later with a variable interest rate.

Of course, there are some private student loans that advertise very low rates. But student loans are like any type of consumer credit, Jarvis said: The best deals are usually available only to those with the best credit, who aren't necessarily the ones who most need the money.

Some students may not have any credit history, Kantrowitz said—another reason the subsidized Stafford loans, which don't require a credit check, may be the most attractive choice.

"In many cases," he said, "it's their only option."

—By CNBC's Allison Linn. Follow her on Twitter @allisondlinn and Google+ or send her an email.