How Much Will It Matter If Student-Loan Interest Rates Double?

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The bell has been rung in the next round of the fight over student-loan interest rates, and borrowers could take it on the chin this time. On July 1, if Congress does nothing, the interest rate on federally subsidized Stafford student loans will double from 3.4% to 6.8%. 

“It’s not the end of the economy as we know it,” says Mark Kantrowitz, publisher of student-lending websites Fastweb and FinAid. He’s right, but that doesn’t mean it won’t really stink, especially for the poorest college students.

Advocacy group U.S. PIRG says it could cost students an extra $1,000 over the life of their loan if the interest rate on those loans goes up to 6.8% in July. In reality, it might be more: some students wind up paying off their loans for upwards of 20 years, and that $1,000 is calculated based on the average one-year loan amount borrowers take out, which is $3,357. But the average bachelor’s degree recipient who graduates with debt does so with $11,329 in subsidized Stafford-loan debt.

Still, as Kantrowitz points out, that’s only a little more than $20 a month. So, for most borrowers, this probably still wouldn’t make much of a difference. The rub is that these subsidized Stafford loans are widely used by lower-income families. In the 2007–08 academic year, about half of bachelor’s degree recipients who graduated with student-loan debt had a subsidized Stafford loan.

Of these, “70% come from families who make less than $50,000; 24% from families with incomes between $50,000 and $100,000; and 6% from six-figure-income families,” Kantrowitz wrote last year in a New York Times op-ed article written jointly with Lynn O’Shaughnessy, author of The College Solution.

Poor students and their families are already grappling with cuts to the Pell Grant system that make it necessary for them to take out more loans if they want a higher education. “I would rather the focus be on reducing the debts by increasing the grants,” Kantrowitz says. But that’s a whole other political battle, and letting rates rise on borrowers isn’t a trade-off that would guarantee a restoration of grant funding.

(MORE: Student-Loan Debt Crisis: How’d We Get Here and What Happens Next?)

Many young people might not feel like they have a choice, though. The Pew Charitable Trusts published a study earlier this year showing that even before the recession, 21- to 24-year-olds with four-year college degrees were employed at a much higher rate than those with just a high school diploma. “Job losses during the recession made existing employment gaps even worse,” the report says. Employment for those with just a high school education dropped twice as much as for those with a bachelor’s degree.

Some student advocates take issue with the fact that the government earns money through its student loans. According to U.S. PIRG, the government will earn more than $34 billion on the money it puts into student loans through the end of the year if rates go up in July.

It cites Congressional Budget Office data calculating that the federal government will make 12.5¢ on the dollar for each subsidized Stafford dollar loaned; 33.3¢ on each dollar loaned through the unsubsidized Stafford loan program; 54.8¢ on the dollar through the Graduate PLUS loan program; and 49¢ on the dollar for parent loans in 2014.

(MORE: Is the Student-Loan Debt Crisis Worse Than We Thought?)

The government’s involvement in the business of lending to students has made even some government agencies uneasy. In 2011, the FTC fined two third-party debt-collection firms hired by the Department of Education more than $4.5 million for illegal practices like making threats and being verbally abusive.

According to the New York Times, the Obama Administration wants to make the rates on student loans adjustable. “The White House budget is widely expected to include a proposal to move to a variable interest rate, pegged to the government’s cost of borrowing, that would be reset every year,” it says.

This might give borrowers some relief now, since rates are historically low. But given that many students take out loans with terms stretching more than a decade, this could mean higher costs for future generations of students.

This isn’t a sure thing; there are some in Congress who are advancing another extension of the 3.4% rate. The downside of that is that it sets up lawmakers for another fight — and throws borrowers into uncertainty — the next time the expiration date rolls around.

26 comments
6uwra792
6uwra792

The gov needs to promote higher education not make it even more expensive, and if it is going to be and stay expensive bring back manufacturing to America and create thousands of jobs that only require high school diploma's or 1-2 years of career training. I'm studying economics and the more i learn about America's economic history and where we're heading, the more i want to move to canada!

Kgibson25
Kgibson25

@COOPFS I think this is absurd.. you want more educated professionals yet you are wanting it to be impossible for them to get ahead..

KennethO'Connor1
KennethO'Connor1

The missing topic no one is commenting on?  Higher Education Underwriting.  Taxpayers need a loan program for college that works better.  Obama eluding to a variable rate government student loan is just the start.  How about considering the students GPA, Major, and income potential from the degree?  College is valuable, but not "Priceless" since it is being paid for with loans the majority of the time.  If everyone is guaranteed a loan without consideration of ability to repay, we will always have people going too far into debt towards degrees that don't pan out into jobs. An arbitrary change in student loan rates for everyone does not account for the deeper issue that needs the attention.

kmhalverson
kmhalverson

In general it's mainly lower income students that are getting subsidized loans to begin with...the rest only qualify for unsubsidized loans with a hefty interest rate well over 8%.

JAFOM
JAFOM

So what? So some kids won't get to go to college. Those who can afford it will and those who can't afford it won't. When did it start that everything and everyone has to be equal. Everyone wants to own a five bedroom house and drive a new car on a minimum wage job. I didn't go to college because my parents couldn't afford it, but my kids went because I could afford it. Get over it.

mary.waterton
mary.waterton

Student loan debt could be the next TRILLION dollar bubble to burst. People are graduating and NOT FINDING JOBS.

GaryRMcCray
GaryRMcCray

This is totally insane.

Students already have debts they can't begin to pay back in their life times.

Many of them are now living with their parents even though they are employed because they cant afford to live on their own and pay back their  student loans.

Let the Damn colleges fail, maybe then the new ones can get back to a financial footing that doesn't have to make life time indentured servants out of their student body.

And now with complete rip off reverse mortgages, they suck all of the money the kids might have inherited out of the loop as well.

Of course the reason that you need those reverse mortgages are to pay the equally insane helth insurance and health costs.

The US corporate model has totally failed.

The American Corporations and the Government they have bought are now, by far the worst enemy of the American People.

Wake UP!

-Ryan-
-Ryan-

Not much when you pay them off ahead of time. Also, my interest rate was never near 3.4%. It was already around the 6.8% mark (in 2010) and reduced to 6.75% when an auto payment was setup. 

Gary1969x
Gary1969x

What is sad is that we have taken education and turned it into a profit related business instead of a priority for our country's future.  Take the whole thing out of context and as a stand alone and look at we've done.

suddendepth
suddendepth

One of the worst pieces of advice during the bank and housing bubble fallout was that it was a great time to go back to school while the economy recovered and jobs were being created. Well, it's about that time where everyone who heeded that advice has bill collectors coming and a good number don't have jobs to show for their education. Welcome to the new bubble, same as the old bubble.

SerenaBelvaScalf
SerenaBelvaScalf

If I could go back I would not have went to graduate school and taken out those loans because I am still underemployed in an unrelated field.  It's been 2 years since I received my Master's and I have not found a job in my field.  Also, I carry over $20,000 of student loan debt.  

lanbr3
lanbr3

The students will not have to take it on the chin.  Uncle Obama will forgive their loans and the taxpayers will take it in the .......

groundskeeper7
groundskeeper7

I have never had an interest rate below 8% on my Federal Loans. Today the rate is fixed at 8.25% and that is where it is going to stay.

SwiftrightRight
SwiftrightRight

@kmhalverson Not really, Just about every body qualifies for a couple of thousand dollars worth of subsidized loans regardless of income. For instance atm a 1st year undergrad qualifies for $3,500.

The difference between poor and wealthy is federal pell grants. Poor folk can get about 2k a year in "free money" assuming they meet attendance requirements and maintain decent grades.

BanaWilkins
BanaWilkins

I agree 100%. My husband and I are both educated, making good money, but living with my mother so we can pay off our student loans and save money. It's insane that what we are making, at first glance, looks good, but because we can't get jobs that pay more, we have to do this. It's frustrating to say the least!

BanaWilkins
BanaWilkins

Same here. I spent $32k on my student loan for my master's only to be told it's not making much of a difference... Sure I'm making more money now, but it's nowhere near what I should be AND paying these loans are insane! Maybe by the time I'm 40 I can START saving for a home... (I'm 30 now)