Are incoming freshmen getting a raw deal when it comes to their debt?
In one of the few bipartisan decisions made last year, Congress agreed to lock the interest rates on new federal student loans to the bond market. At the time, most people were applauding the decision. Although some – including Consolidated Credit – had concerns that what seemed like a great deal in fall 2013 might be a raw deal for students down the road.
Fast forward to spring 2014 and less than a year later we’re already seeing the bad side of this new law. CNN reports that the improvement in the bond market (a good thing for investors) may now lead to an interest rate increase of nearly a full percentage point on government student loans.
What 1% added interest really costs
According to reports, the average student graduated in 2013 with $29,400 in student loan debt. Under the new deal, incoming freshmen in fall 2013 got their loans at 3.68 percent interest. On the other hand, incoming freshmen in fall 2014 would be getting their loans at 4.68 percent.
That may not sound like a lot of money, but it adds up over the life of the loan. Most student loans have a 10-year term, so how much would each group of incoming freshmen pay for $29,400 in loans?
Once their loans came due, incoming freshmen last year would be looking at monthly payments of $293.21. Total interest paid over the life of the loan would be $5,785.20. By contrast, a student who takes out the same amount this year at 4.68 percent would be looking at monthly payments of $297.66 and a total interest of $6,319.28 over the life of their loans.
“That’s a sizeable difference in the amount of money students will pay,” says Gary Herman, President of Consolidated Credit, “and this wasn’t something that couldn’t be predicted when the new deal was signed – the writing was on the wall that once the economy started to recover and bond rates rose, students were going to get a raw deal.”
Will the “new deal” be replaced with a newer deal?
Just as reports of the interest rate hike hit the wire, Elizabeth Warren (D-Mass.) publicly released her proposal for the “Bank on Students Emergency Loan Refinancing Act“. This would supplement the new deal from 2013 with additional legislation that allows students to refinance their loans just like homeowners can do with their mortgages.
This would alleviate the “crap shoot” aspect of the new deal – where if you are applying for college in a year where bond markets are weak then you get low interest rates, while if you apply when markets are strong, you end up with high rates. That would still happen, but students could at least take steps to reduce the interest they’re paying when rates are good.
What’s more, Warren wants this new act to apply to ALL student loans. Current law only relates to federal loans like Stafford Loans – not private loans that many students have used to supplement their federal aid.
Missing the debt forest for the interest rate trees?
Of course, Herman argues, all of this debate is really missing the key issue.
“Students are paying too much for higher education, and fixing interest rates won’t do anything to solve that larger issue. Even with the perfect rate solution, tuition costs continue to rise, putting college out of reach for many Americans.”
Consolidated Credit also looked at higher education costs in another infographic last year. Average yearly tuition was $3,449 in the 80’s, where it was $9,733 in 2013. Even just looking from 2000 to 2010, tuition costs increased 500 percent!
“Something needs to be done to make education more affordable for everyone,” Herman points out. “By making education more, affordable you reduce the need to rely on borrowing for continuing education.”
For more information on student loan debt help if you’re already struggling with student loans, visit Consolidated Credit’s section on student loan debt consolidation. We also offer more advice to parents and students to make college more affordable.