by Stephen Fortin
College costs have been steadily increasing since the 1970’s. As of late, the costs have continued to sore at an even faster pace. Accompanying the rise in college education costs is student loan debt. In fact, the recent 2012 grad owes over $29,000 in student loans. This is up from more than just over $9,000 in 1993. With this increasing burden on America’s younger generation it would seem logical to lower the federal interest rate on student loans.
Current students are paying about 4.66% interest on student loans, although there are many others who have interest rates which are locked in at above 9%. It seems obvious that higher education is vital to America’s economical future. Having a well educated public defines a society and an economy. Despite this however, lawmakers are rejecting proposals to lower federal student loan interest rates. In fact, government seems to believe banks should pay lower interest rates on federal loans than students. Banks pay a rock-bottom interest rate of only 0.75%. College costs are a huge issue plaguing the prospective college student, but it seems the government prefers to see banks prosper than young Americans invest in their own futures.
As many Americans struggle with paying back college debt the government seems to turn a cold shoulder. College costs and debt should never be a matter of politics; yet as many struggle to pay back debts, government struggles to see the problem in favoring banks over students.
Quandt, Katie. “College Has Gotten 12 times More Expensive in One Generation.” Mother Jones. N.p., 3 Sept. 2014. Web. 21 Sept. 2014. <http://www.motherjones.com/politics/2014/09/college-tuition-increased-1100-percent-since-1978>.
Today’s Philadelphia Inquirer has an editorial calling on Congress to address the coming spike in student loan interest rates. Legislative inactivity will cause rates to spike from 3.4% to 6.8% per year beginning July 1. To see what that means to people with student loans let’s take a look at the numbers. According the Project on Student Debt, the average level of student loan debt for college graduates in 2011 was $26,600. This level of debt, paid over a 10 year term, @ 3.4% would require a monthly payment of $261.79 according to a loan calculator. The same loan @ 6.8% would require a monthly payment of $306.11 0r an increase of $44.32 per month. This number doesn’t seem particularly egregious, but when you factor this over the course of a ten year loan it means that graduates would pay an addition $5318.40.
The Inquirer notes that all of the existing plans for addressing the student loan rate spike are inadequate. According to the editorial
None of these plans recognizes the tremendous public benefit of an educated populace. People with postsecondary education are more likely to become self-sufficient, taxpaying members of the middle class. That contribution to the greater good and to democracy is worth something.
This is food for thought as Congress debates how to keep college affordable.
NPR’s Morning Edition conducted a valuable interview on college debt with Ron Lieber of the New York Times (Debt and the Modern Parent of College Kids). Mr. Lieber provided tough, but common sense, solutions to the problems of financing education. Two parts of the discussion stand out.
First, he suggested that parents think of funding college in three 33% increments (the 20/20/20 plan if education were to cost $60K over four years) . First, parents could save one third of the costs of college over the period of 18 years through a manageable savings plan. Second, they could pay 1/3 of the costs out of pocket while their child was in school. He stated
“It might mean some sacrifices — some very careful budgeting, a lot of rice and beans on the table — but it’s doable.”
The final third of higher education costs could be subsidized through federal loans. The 20/20/20 plan seems sensible because
[w]hen you start to divide it into chunks, it starts to seem at least within the realm of the possible.
Mr. Lieber’s second useful suggestion involved a bit of pragmatic toughlove for parents. He says that sometimes emotions have to be trumped by rationality when children get accepted to a top tier school.
[T]here’s this feeling of ‘Can I or should I say no to my child who wants to go to a $60,000-a-year school when they’ve already gotten admission to the flagship public university in our state that only costs $20,000?’ And then there’s the question of ‘Is it worth it? What am I getting for the extra $40,000 and would we be able to pay our own debt back if we were to support the dream of our child?’ These are all deeply emotional decisions, and you have to begin by acknowledging that it’s feelings that are on the table first before you look at the hard science of the numbers.
Please listen to the rest of the story for more information on what types of loans to take out and whether it is worth it to borrow against retirement.
The Pew Research Center recently released Young Adults After the Recession: Fewer Homes, Fewer Cars, Less Debt. The study examines the borrowing habits of younger Americans over the last decade. The report concludes that they are taking on less debt, primarily in the areas of home mortgages and car loans. In part this is the consequence of delayed marriage and household formation among the younger demographic group. The Pew study found that “the median debt of households headed by those younger than 35 fell from 2001 ($17,938) to 2010 ($15,473).”
Unfortunately, the only type of debt to increase in recent years has been from student loans. Pew found that
Student debt was the only major type of debt to increase in prevalence among young households during the recession. In 2007, 34% of young households had outstanding student debt. By 2010, 40% of younger households had student debt. However, the median amount owed by households with student debt fell from $14,102 in 2007 to $13,410 in 2010.
This number is up substantially from 2001 when only 26% of younger households had outstanding student loan debt. Debt from student loans has also increased as a proportion of outstanding debt: from 7% in 2001 to 15% in 2010.