Government-backed student loans have become an integral part of college tuition payments and, for many of us, these loans provide the only outlet of affordability as college prices continue to shoot through the roof.
But the interest rate for Subsidized Stafford loans is set to jump up from 3.4 percent to 6.8 percent on July 4.
The new deadline marks yet another budget standoff in congress, something that has become almost routine since the last election.
This increase, set to affect the new batch of students beginning college next year, amounts to roughly $5,000 more for the same maxed-out loans. Congress faced a similar deadline for student loans last summer, but was able to dodge the bullet and postpone such decisions another year.
“What is definitely clear, this time around, there doesn’t seem to be much outcry,” Justin Draeger, president of the National Association of Student Financial Aid Administrators, said.
While representative Karen Bass of California proposed to cap the rate at the current level, neither party has set money aside in their budget to keep the interest rate from jumping up.
Absent from such proposals is a plan to come up with the 6 billion-dollar gap that is the estimated cost of keeping rates low.
It is important to recognize that interest rates have only been low over the past several years. Congress lowered the rate to 6 percent for the 2008 academic year, then down to 5.6 percent in 2009, to 4.5 percent in 2010 and all the way to the current 3.4 percent in 2011.
These changes were heralded as creating affordable loans for students in dire need of financial assistance. For some, these low rates have certainly helped; for others, and for the rest of the country, the inability to pay back these loans has created huge revenue gaps, regardless of changes in rates.
Perhaps there should not be as much outcry this time around. Over the past year, some worrying statistics regarding student loans have emerged amid the realization that debt is reaching astronomical levels.
Quite frankly the money is not there. Students become saddled with huge debt, but have increasing difficulty paying it off. Two thirds of students are graduating with more than $25,000 in student loans, and one in 10 borrowers owes more than $54,000. Total student loan debt in the United States has reached an incredible $1 trillion.
The Congressional Budget Office estimates that of the $113 billion in new students loans this year, $38 billion will be lost to defaults. This means that, yet again, the taxpayer will likely be on the hook.
Reminiscent of the recent bank bailouts following the financial collapse of 2007, many are fearful that a student loan bailout will be the next major government expense to alleviate the burdens of poor loans.
The comparisons between subprime mortgage loans and student loans do not end there. Just like the lax mortgage lending that led to defaults across the country, federal-backed loans seem to be following the same disturbing pattern.
The government lenders do not distinguish between a student’s choice of major or employment potential and they seem to overlook that young students have little collateral and no credit; essentially, these blanket policies make student loans inherently risky. They are just bad loans.
The results should not be that surprising. The student loan 90-day delinquency rate increased to 11 percent by the end of 2012 and for the first time exceeded the “serious delinquency” rate for credit card debt. It is creeping ever closer to the 16 percent subprime mortgage delinquency rate that was present at the beginning of the bubble burst.
Though a college degree is almost a necessity to reach a high-paying job in today’s world, it certainly does not guarantee one. The notion that a degree can be translated into income that will pay off student loans with ease has proven itself a myth.
For these reasons, the increase in interest rates for student loans is unfortunate, but necessary.
While I fully believe that tuition hikes are pricing students out of the college market, history and current statistics show that these loans are not being paid back, and that liability is likely to fall on future generations unless they can find a way to increase revenue from payments.