Indiana

Education, From The Capitol To The Classroom

How Much The College Loan Interest Rate Hike Would Cost You

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Then-Senator Obama addresses a town hall forum during a presidential campaign stop at Indiana University Southeast in April 2008.

Federal lawmakers can’t agree on how to pay for legislation that would prevent student loan interest rates from doubling. The measure stalled in the U.S. Senate this week.

President Obama has made the $6 billion measure a “top domestic priority,” Politico writes, saying it would save the average borrower roughly $1,000 of debt. Presumptive GOP presidential nominee Mitt Romney also supports the measure.

But crunching the numbers for a New York Times editorial, Mark Kantrowitz and Lynn O’Shaughnessy say that savings number is closer to $761 for the average borrower. Stretching that out over the life of a ten-year loan, that means borrowers save how much on a monthly payment?

“$6 a month extra for one year of loans” on average, they write

The Stafford debate is more rhetoric than substance. If the rate on the subsidized Stafford loan program does double, as scheduled, to 6.8 percent this summer, very little will happen…

Let’s look more closely at what’s on the table. The proposals that Congress has been debating would extend the 3.4 percent interest rate for only one year. If a student borrowed the average subsidized Stafford loan ($3,357) at 6.8 percent for the next school year, the higher interest rate would boost the borrower’s debt burden by $761 over a 10-year repayment period. Even if the interest rate doubles, the monthly payment on the subsidized Stafford loan would increase by only about one-sixth…

Congress often passes this sort of legislation with a 5- or 10-year window, so it’s reasonable to ask whether this political battle was anticipated by Congressional Democrats, who knew they would gain political brownie points if the Republicans, in the months preceding a presidential election, balked at extending the low rate.

As we’ve written, the bigger issues of college cost don’t go away regardless of whether this interest rate measure passes.

It’s like Nick Hillman, a professor of higher education policy at the University of Utah, told StateImpact last month:

We’ve moved away from a system of grants to one of loans and tax credits. This is a demonstration of our policy values where we want to put more of the responsibility on the individual students, so taking out debt is becoming an expected thing to do.

It might not be a bad thing. Taking out debt to pay for a portion of school might not necessarily be a bad public policy option, it might actually help a lot of people enroll in college. But it’s when that debt burden hits that tipping point where it becomes unmanagable, it becomes burdensome, it becomes inequitable for certain borrowers, then you start to have a problem. That’s what we’re starting to see.

Comments

  • BaileyTheDog
  • http://profile.yahoo.com/XBWSRJTKQWZUKAORYLUIJ7OG3U Riverotter

    surprise, surprise, surprise. It’s about politics, not real savings or sound policy.

  • Sb20143

    Typical student debt (which averages in $0 debt for many students from well off families) is roughly $20,000 after graduating from a 4 year college with a baccalaureate degree (http://www.finaid.org/loans/). Piling on debt associated with the acquisition of graduate or professional degrees greatly compounds this burden for our most talented, trained and desperately needed citizen scholars. These individuals enter the workplace with great debt… when they are earning the least and taking on other large debt responsibilities of young adult life. Consequently… this bogus “analysis” based on an “average” loan of $1000 is grossly misleading – a pandering, political statement. It is beyond “unethical”. If you view the world through a religious lens… then this article might be considered “evil”. It is a deliberate lie… whose consequence is great and known harm.

    • Barracuda67

      I believe you misunderstood the article. It did not say an “‘average’ loan of $1000.” It said that the debt would be reduced by $1,000 (or $761).

      • anonSLP

        It did, however, state that the average loan is $3,357. That is for a single Stafford loan. I wonder if they are not taking into account that many students take out multiple Stafford, PLUS, and private loans to pay for college and graduate school. I am currently employed full-time in the field for which I went to graduate school and am unable to even pay off the interest on my loans every month (for full disclosure, my loans are at a higher rate than the current one and I am the provider for a family of three since my husband is unemployed).

    • http://twitter.com/StateImpactIN StateImpact Indiana

      Where we are in Indiana, the average student takes on more than $30,000 in debt for every degree they earn. We’ve written about that before. That debt burdens are growing isn’t what we’re disputing here: http://stateimpact.npr.org/indiana/2011/08/10/indiana-student-debt-burden-grew-sharply-in-recent-years/

  • Dsemeldefeo

    Moving “away from a system of grants to one of loans and tax credits … might actually help a lot of people enroll in college.” I guess all those years of us believing the laws of supply and demand are over. Well analyzed, Nick Hillman. The whole rest of the industrialized world is trying to better educate their citizenry and we’re bailing out banks that are too big to fail with trillions of dollars. Maybe owning 40% of our national resources just isn’t enough for the 1%.

  • http://www.facebook.com/people/Jeff-London/1219546630 Jeff London

    america should pay for all upper education…
    investment in the future…
    world work lik NY city college…
    make the grade…or you are out…on to something more suitable…
    rank of 17 in sciences is a disgrass…
    love of money/worth/possessions took place of analytic education…

  • http://www.facebook.com/people/Joe-Anybudy/100003799274417 Joe Anybudy

    The gov’t is pumping too much money into higher education. They are fueling an unsustainable bubble. College administrators and professors are gleefully puffing on expensive cigars from the seats of their BMWs. It’s time to demand concessions from the education industry.

  • guest

    This article wasn’t what I was expecting. I wanted a way to type in my numbers and actually find out how much this will cost me. Not that I really want to know, but we should have the tools available to find out.

    • http://twitter.com/StateImpactIN StateImpact Indiana

      Thanks for the comment, good to know. Don’t mean to “false-advertise”! I don’t know a good tool that I could put on the blog for that. I’m not a programmer, just a lowly blogger :)

      But if you want to “spitball” the math yourself, though, it’s actually pretty simple. What it appears Kantrowitz and O’Schaughnessy have done is take the average difference between a 10-year loan at 3.4 percent interest and a 10-year loan at 6.8 percent interest ($761 on average), and divided that savings over 120 months to give an average per-monthly-payment savings.

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