As of August 2013, it appears that the U.S. Congress has come to a compromise that will roll back the doubling of interest rates on student loans from 3.4 percent to 6.8 percent. The compromise ties student loan rates to the 10-year Treasury note, adding 2.05 percentage points for undergraduates and 3.86 percentage points for graduate students. That will keep rates for undergrads below 4 percent for the 2013-2014 academic year. With rates that low, it’s debatable whether lowering them any more would help students in the long run.
Of course, any reduction in interest rates for student loans means less to repay, but interest rates don’t seem to be the problem these days. In fact, many economists and other experts argue that it would actually be a better idea to stop subsidizing student loan rates and instead allow them to carry market rate interest rates. For example, Neal McCluskey, Associate Director of the Cato Institute’s Center for Educational Freedom, told U.S. News & World Report that higher rates would encourage potential students to think a little harder about borrowing money for school.
Matthew M. Chingos, a fellow at the Brown Center on Education Policy at the Brookings Institution, makes a similar argument, telling the magazine that low interest rates are an inefficient way to encourage college enrollment.
Another argument against lowering student loan interest rates is the potential for a bubble in student lending similar to the housing bubble. The lower the rates, the more people are encouraged to borrow, which can lead to huge problems when there is an economic shock that makes it difficult for borrowers to pay back their loans.
Many experts argue that a better option is more forgiveness for current borrowers. Currently, it’s very difficult to discharge student loans in bankruptcy. You basically have to prove you are permanently disabled, are so poor and will be for such a long time that you can’t make the payments or that your payment amount makes it impossible for you to maintain a reasonable standard of living.
There are government loan forgiveness programs for people who go into government or non-profit jobs, such as working as a firefighter, teacher or police officer, but they have very strict requirements. You have to make 10 years of payments toward your loan and basically have a perfect repayment record, with no late or missed payments, to even apply for such forgiveness.
Making it easier to use those forgiveness programs, either by allowing more loan forgiveness or by broadening the range of jobs that apply, would aid in two ways. It would give more people the chance to get relief from their student loans and it would also draw more people into social service-type jobs that may be short of workers.
Another potential fix is to make higher education more affordable. Since 1980, tuition at private colleges has more than doubled, while tuition at two-year public colleges has risen more than 50 percent. While it is true that the value of a college education has increased relative to earnings power compared with a high school education, it still puts college out of reach for many people without loans. The flip side of that is because of the premium placed on a college degree, many people feel they need to go to college to better their earnings potential.
If you have gotten into a debt problem because of your student loans, you may need advice on what you should do next and whether bankruptcy is an option or if another route can be found. You can find such advice at bankruptcyadvice.co.uk.
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