Until June 29th, a big problem was brewing for college students but less than two days before the deadline, Congress agreed on a bill that would avert larger student loan payments for some students.
The cost of college rises at roughly twice the rate of inflation each year. This equates to nearly 6% annually and that has made college tuition out of reach of the majority of families that didn’t save for education costs. Because of that, most students now rely on grants and loans to pay the costs. Grants quickly run out for most leaving student loans as their only option.
The federal government helps by offering two types of loans, called Stafford loans.
The unsubsidized loans offer an interest rate of 6.8% and don’t require students to start making payments on the loans until they graduate although interest continues to add up while they’re in school.
The subsidized Stafford loan has two advantages: First, the interest rate is cut in half giving students a rate of 3.4% and second, the Federal government pays the interest on the loans while the student is still enrolled.
When the Democratic Congress took over in 2007, they lowered the rate on subsidized student loans dropping the rate to a low of 3.4% but that legislation was due to expire on July 1st, 2012. This would have restored the original 6.8% interest rate causing students to pay hundreds of dollars more each year.
With unemployment reaching 14% for those 20-24 years old, the two presidential candidates, along with Congress, knew that allowing interest rates to double would be unpopular.
Both sides of the aisle agreed that the rate should remain at 3.4% but the Republicans wouldn’t approve a bill without finding a way to pay the $6 billion price tag that comes with it.
A Transportation Bill
On June 29th, Congress voted to extend the subsidized Stafford loan interest rate of 3.4% for an additional year.
The legislation appeared in a transportation bill that appropriated funds to continue the maintenance of roads and bridges through July 6th while a more permanent bill is completed. Additionally, the bill extends the Federal Flood Insurance program that protects families against floods. The $6 billion to fund the cost that comes with the extension of the lower interest rate will come from changes in how companies fund pension programs.
The new student loan provisions are only temporary measures. The extension is set to expire on July 1st of 2013 making it a necessity that Congress take up the issue again next year. Yes, we’ll have to go through this again in a year.
With the student loan delinquency rate now at 14.6% and a large number of college graduates unemployed, both political parties knew that allowing the rate to increase would place further pressure on college graduates still looking for a job.
Still, the rate will eventually have to go up. Or we’ll have to admit that we want the government to subsidize loan rates for students (not necessarily bad but a discussion for another day). Either way student loan debt is quickly turning into a bubble which, if burst, will seriously set back our economy.
For now students win. Hopefully those getting loans under this still low rate choose their degrees wisely and are able to pay back their student loans.
Jenna, Adaptu Community Manager says
Glad they were able to solve things before time ran out. And that it got extended. I think getting help to earn a college degree is something we should encourage.
Glen Craig says
Intelligent people that can create is what our economy needs. If lower student rates can help that then that’s a good thing. Hopefully all students are intelligent with their loans though and aren’t getting set up for a mountain of debt, even with low rates.
Rod Rogers says
My daughter is about to graduate from college with no debt – she never borrowed a cent. She worked cleaning offices with the rest of our family. Next year she’ll be going to England for several months – all of this with money she’s earned cleaning offices. I’m a big proponent of starting your own office cleaning to pay off debt, fund college, retire early, etc.
Manette @ Barbara Friedberg Personal Finance says
I do not see anything wrong with availing of student loans to be able to finish college. However, wouldn’t it be better if we start saving up for our children’s college education while they are still young? I would, of course, help my children raise the money they need to have a good college education while teaching them financial responsibilities and working to earn money for themselves.
Rod Rogers says
With about one-half of all students who start college NOT finishing, with student loan defaults at 14.6%, and 80% percent of graduates NOT working in their degree area within 3 years of graduation, are you sure student loans are a good idea?
JP @ My Family Finances says
I don’t see the loan interest issues as big of a problem as the tuition inflation issue. It seems that time in congress would be better served figuring that beast out. Stemming the rate of tuition inflation would be a far bigger boon than lowering interest rates.
Just my 2 cents on optimizing an agenda.
Glen Craig says
Part of the tuition inflation may be the fact that student loan rates are so low. That creates more demand for college while the supply (college degrees) stays the same.
I don’t think congress should get into the field of fixing private industry prices but if there are ways to keep low tuition options out there then they should be looked into.
Growing up in NYC I always had the option of a city (CUNY) or state (SUNY) education which have very low tuition compared to private universities.