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Interest Rates on Student Loans: Another Crisis

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The Republicans and Democrats are at in again, debating the future of college loan interest rates. Currently the debate rests in the Senate: the House passed a bill last week that would tie the interest rates on student loans (or Stafford loans) to the 10 year treasury plus 2.5 percent. The rates would be readjusted each year. The concept of subsidized loans versus unsubsidized loans would be eliminated, and all student loans would be subject to this rate, regardless of a family's demonstrated need. To give you a sense of what this would mean, today the rate would be approximately 5 percent.

Currently, the subsidized student loan interest rate is 3.4 percent, and the unsubsidized rate stands at 6.8 percent. Although it seems a 5% rate would create a simpler process, it would actually increase the debt obligation for the families who have the greatest need. Since interest rates in general are currently at an all-time low, all student loan interest rates could see an increase in the future.

Doing nothing is not a solution either: if Congress fails to act, the subsidized rates will revert to the current unsubsidized rate of 6.8%. This rate increase would create an even greater issue for college graduates who are already experiencing great difficulty paying back their student loans.
There are specific payment implications of these rates assuming the timeframe for repayment is the traditional 10 years.

If a student borrows the current Stafford Loan maximum of $31,000 (which assumes a 5 year college graduation time frame), and pays the interest on the loan each year in college, the monthly payment after graduation is $357 per month. Under the current program, assuming that $19,000 of the $31,000 is subsidized, the monthly payment on both the subsidized and unsubsidized loan (again assuming that the interest is being paid on the unsubsidized loan), is $325 per month.

Over 10 years college grads would pay $3,800 more on their loans -- this doesn't seem to make sense given what we know about today's heavy default rates.

The heart of the issue is that some members of Congress (mostly Republicans) do not want to subsidize any of these student loans going forward with reduced interest rates. This sentiment is deeply concerning for families who are unable to just write a check to pay for college.
This author is a strong proponent of solving the college debt crisis with improved college financial literacy and improved college decision making. However, I do believe that the government must also have a role. Increasing loan repayment will only exacerbate the current national college debt crisis, not help to solve it.