Posts published on June 29, 2012

Loans Hinder Graduates Economic Mobility

Guest Blogger:Katheryn Rivas

In the last days of the debate over federal loan rates, lawmakers seem to be reaching a compromise. Students who take out loans for the 2012-2013 school year will most likely be offered the same 3.4 percent interest rate from the 2011 enrollment year.

The gradual drop in rates was part of the 2007 College Cost Reduction and Access Act, a temporary budgeting tactic scheduled to expire July 1 of this year.  Though the law has had controversial effects on student and government spending, many are championing the low rate as a pro-education win that will provide more students with access to higher education.

Others argue that – in a country where student loan debt is tipping $1 trillion – maintaining an attractive interest rate for federally subsidized loans is the wrong decision.  To keep the interest rates low, lawmakers will need to slash $6 billion in the budget, which they have proposed to do through corporate pension requirements and restrictions on the loan itself.

Like its parent law, the compromise, which is anticipated to affect 7.4 million students, would be temporary as well, ending June 30 of next year. Reports say that though new borrowers will lock in a low rate, they will not be able to skirt interest rates for more than six years and will not receive an interest-free period coinciding with the six-month grace period.

Is a Low Rate a Good Solution?

Though the low interest rate lower the financial burden for students – reports have quoted $1,000 to $5,000 over the lifespan of the loan – by subsidizing this low interest rate, the federal government has justified cuts in financial aid such as the Federal Pell Grant.

In his article “The Problem with Cheap Stafford Loans,” Josh Barro, a contributor for Forbes, suggests there is also a risky consumer mentality associated with lower interest rates. Essentially, by making the loan a “good deal”, students can perceive the value of the subsidy to supersede that of the actual debt. This makes it easier for them to take out a loan, or borrow more for their education than they may have otherwise done.

Barros suggests a real win for education would be to invest in financial alternatives for students:

“Instead of extending the policy of holding Stafford Loan interest rates very low, why not let rates go back up and redirect the cost of the subsidy into an expansion of Pell Grants and refundable tuition tax credits?”

Is Education Still a Vehicle of Economic Mobility?

Any debt-financed investment poses certain risks, and higher education is no exception. With half of today’s graduates underemployed or unemployed, the burden of repaying student loans has become an economic stumbling block for many recent graduates

However, many students are forced to rely on student loans to bridge the gap between their household income and the costs of tuition.  This can be attributed to fewer financing alternatives and increasing tuition prices. On a national average, state and local funding has declined by 24 percent while the cost of college has increased by 72 percent.

Those who hold college degrees still earn significantly more than non-graduates in their lifetimes, but among college graduates struggling to reach middle class standing or above, debt has become a major factor in mobility. Graduates are reportedly stalling life-cycle events such as buying a car, purchasing a home and even getting married and starting a family due to the burden of student loan debt.

Student loan debt cannot be dismissed in bankruptcy, and the extreme case for graduates (and for co-signing parents) is facing retirement either deeply in debt or with a depleted savings account.

Katheryn Rivas is a freelance writer and resident blogger at online universities, a site dedicated to distance higher education.  She welcomes your comments at katherynrivas87@gmail.com.