Practical Dad

Piling On:  Student Loan Rate Increase

With the push for austerity continuing - despite persistently running a pesky trillion dollar budget deficit - the word is out that the government is acting to save several billion dollars by doubling the interest rate on subsidized Stafford loans.  The Stafford loan is one that's used principally by lower and middle-income undergraduate students and the subsidized rate - where the government covers the interest cost while the student is in school - is slated to double from 3.4% to 6.8% starting in July 2012. 

The public is increasingly aware of the issue of student debt, which has now supplanted both auto loans and credit card debt in magnitude.  Couple this with the concept of doubling the interest rate and it's newsworthy.  Before I start my own rant, I thought that it would be good to determine what this means in a real-world situation, for an 18 year old freshman set to attend good ol' Wassamatta U.  The parameters of the subsidized Stafford loan are that it has a ten year repayment term with a present rate of 3.4%; a student with dependent status can borrow up to $20,500 cumulatively over four years (Scenario 1) and an independent student with no family support can borrow a total of $57,500 (Scenario 2).  Using the Bankrate.com student loan calculators with these parameters, the monthly repayments are shown below.

Scenario          3.4%          6.8%

1                      $201.76     $235.91

2                      $565.90     $661.71

The nominal figures, at least for the kid with dependent status, don't seem to make much of a difference but those of us reading this are years beyond college and not staring at these bills with a deer-in-a-headlight expression on our faces.  There are several things that I take from this situation.

First, while our public spending is clearly out-of-control, a move like this smacks of a public relations move to show the electorate that Congress is on the ball to cut wasteful spending.  The problem however, is that this is simply piling on a group that is politically voiceless and powerless because of youth and a lack of experience.  The TBTF financial institutions are coddled and sheltered from the consequences of their actions and the middle-class still capable of getting a mortgage can obtain one at a rate less than 4%.  But these kids are going to have to accept a doubling of their interest rate.  Congress is simply trying to treat a hemorrhaging stump with a three inch gauze pad and medical tape.  We've pushed the concept of a knowledge-based economy for years yet when the kids are moving to prepare themselves, many with families that only have limited means to assist them, society and government are stating that they're on their own.

Second, how far out of touch are the members of Congress from the typical American family with a kid facing the issue of paying for college?  The most recent data, as of 2010, shows that the average net worth of a member of Congress rose to $3.8 Million;  this is an increase of 23% from 2008.  When your financial situation is such that your kids aren't going to face questions of paying for higher education and you live in a cloistered environment like the nation's capital, you aren't going to appreciate the real world, fly-over country consequences of your actions.

Third, there's a further impact upon the economy.  Experts state that one of the large drivers of the economy is the homebuilding industry and construction.  However, we have an inventory glut of millions of empty houses and anything that impedes the formation of new households to whittle down that glut is ultimately counterproductive.  With kids coming out of school with tens of thousands of dollars in non-dischargeable debt wrapped around their neck, they'll avoid any thought of forming a new household and the situation is only worsened.  Couple that with a higher young adult unemployment rate and lousy prospects and these guys are going to run for the family basement.

While people should be responsible for their own - and their kids - education, the reality is that this nation has a long history of supporting education.  The heritage of the land grant universities of the 19th century and the GI Bill of the 20th century demonstrate our ancestors' recognition of the importance of education.  This proposed action by Congress is simply an act as short-sighted as these previous Congressional actions were far-sighted.

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