College Loan Interest Rate Debate

Brent Pittman —  04/27/2012

Student loan debt got you down?

The debate about subsidized federal student loans is reaching a fever pitch this week. The issue is becoming an election year center piece as the student loan bubble takes center stage in an election year power struggle. **This is not a political post or blog, but only looking at the college loan interest rate debate and root causes**

Sometime today   there will be a vote in Congress * whether to hold the student loan interest rate at a subsidized 3.4% or have them reset to to their original 6.8%. *Update the Interest Rate Reduction Act passed the House and will be sent to the Senate.

This is a big deal since Americans owe over 1 trillion dollars of student loans (Federal +Private). That is $ 1,000,000,000,000 ! Are you part of that number? I used to be.

How to Fund the Subsidized Loans

One key issue of the debate is how to hold the interest rates artificially low at 3.4%. The money has to come from somewhere.

How much money is needed? I’ve not found any numbers, but if you take 3.4% of $ 1 trillion you get $34,000,000,000. From my rough estimates federal loans are 75% of this large number so the federal government will have to foot the bill for roughly $25, 500,000,000.  Wow! That number continues to grow by semester. *If someone has a better figure please let me know!

The GOP has a plan to subsidize the loans by taking money from healthcare. The Democratic Party plans to get the money from high income earners and oil companies. Both plans seem flawed, focus on the quick fixes, and ignore the real issues.

The Real Issues with Student Loans

The real issues with student loans are multifaceted and complex. Here are a few deeper issues to address:

1) Improper View of College #1– College is not a right, it is a privilege. College is a service that has to be paid for. If it isn’t something you can afford (now or later) then consider not going. Yeah, you read correctly. There are other alternatives to a traditional college experience that can lead to success, and without the high cost of debt.

2) Improper View of College #2- A college degree will not ensure you success or even a job. Countless graduates with a college degree are serving my dinner when I dine out.

3) Reliance on Debt. American students have been lead to believe that the only way a college degree can be had is through loans and debt. This is a lie. Debt-Free U by Zac Bissonnette (affilate link) gives many alternative ways to pay for college without going into debt.

4) Soaring Education Costs – Education costs rise faster than inflation, in some states like California–much higher. It is debated as to why tuition keeps rising. Some possible causes are rising salaries, educational waste, loss of state and federal $. Basic economics can be to blame too–supply and demand. More demand of a product garners a higher price.

Until these real issues and addressed, no government subsidy will fix the deep rooted problems with the higher education system in the United States.

What are your views on the college loan interest debate and the real issues with the higher education system? 

Photo Credit: lumaxart (Creative Commons)

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Brent Pittman

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Brent is a financial coach and writer looking for the perfect donut. He believes personal finance should be both fun and accessible to anyone willing to learn.
  • I continue to be amazed at the levels of debt colleges will encourage teenagers to take on knowing those kids will become ,for all practical purposes, indentured servants.  And in all the talk about who is to blame for the mountain of student indebtedness, the universities themselves are never blamed for the high cost of tuition.

    • Thad, universities and colleges could do a better job at educating students on choosing majors that will warrant the amount of debt they incur. I’m sure there is a lot of waste in higher ed too. 

  • In general, I am in favor of subsidizing student loans. Because the reality of the situation is not everybody who SHOULD go to college will be able to secure sufficient scholarships.

    What I don’t understand is WHY interest rates are set to double.  Interest rates on other things aren’t rising; the Fed has said they don’t plan on raising rates for two years. And student loans can’t be cleared via bankruptcy. So the risk of banks not getting their money back is pretty low. Rising rates have a bigger likelihood of making the banks loose their investment.

    • Edward, interest rates are not really doubling, they are just being returned to their original 6.8% for federal loans only. They were brought down to 3.4% with previous legislation. Looks like the House choose to extend the lower rates today, but who knows if Prez will veto?