Earlier this month, Republicans and Democrats came together to extend the 3.4 percent interest rate for students enrolling in the 2012-2013 school year who opt for a federally funded Stafford loan. The interest rate was scheduled to return to the original 6.8 percent, but the lower rate is scheduled to remain for at least a year.
While many students and parents are lauding the decision to keep the lower rate as a pro-education decision, it could actually contribute to an increased dependence on loans for financing education.
Lower loan rates make it easier for consumers to justify borrowing money. This consumer mentality can lead borrowers to perceive the value of a “good deal” as a mitigating factor for the risk of the debt.
Today, Americans carry $1 trillion in student loan debt; and many are struggling with the repayment. College graduates are postponing milestones like getting married or buying a home due to the burden of household debt. The problem for many young students is that they fail to assess the risk of making a debt-financed investment until it’s too late.
The Bigger Picture
Once college graduates enter the workforce, they often find themselves at the bottom of the totem pole. The job market is flooded with college graduates and seasoned professionals alike. Competition is fierce and income is generally low. The burden of student loans stifles spending, which contributes to the sluggish pace of the economy.
In a slow economy, local and state governments are forced to cut funding; and over the past decade, state funding for education has fallen by an average of 24 percent per student while tuition and fees have increased by 72 percent.
The recession also spurs higher competition for state awarded scholarships and grants, but with less funding, more students are forced to rely on student loans to bridge the income gap. In an uncertain economy, students and parents often agree to terms with no way of knowing if their risk will pay off.
By subsidizing this year’s low rate of 3.4 percent, the government had to compensate for the $ 6 billion in costs. They also had to limit the terms of the Stafford loan, making students who have been enrolled for more than 6 years ineligible.
Like its parent bill, the 2007 College Cost Reduction and Access Act, this year’s legislation is only a temporary solution and is scheduled to expire in one year.
Smart Spending as a Solution
While there’s no denying that the cost of college has ballooned in recent years, a recent study shows that there is a difference between the published cost and the actual net cost of a college education. In many cases, the cost is actually less than advertised. However, one drawback is that the bloated published figures make it easier for students to borrow larger sums of money than necessary.
To make it easier for students to calculate actual education costs, each university is required to offer a net cost calculator. If taken into consideration, this could help students budget more effectively.