Although I write these blog articles mainly discussing my own financial concerns and decisions, occasionally I worry about other people, and the nation too.
I think the interest rates the government set on the Stafford loans are way too high. The interest rate on new government-subsidized Stafford loans is set to double on July 1 – to 6.8 percent from 3.4 percent – unless Congress acts to stop it. As I said in the article Federal Student Loans Create Debt Kids, our congresses are not well known for their efficiency.
In the issuing of Federal loans, including both Subsidized Stafford Loan and it Unsudsidized cousin, and the Parent Plus loan, our federal government is acting as the lender. How does the US government come up with the money? With its vast taxing power and freedom of issuing more money, the government nowadays can borrow at rate around 1.71% (10 year Treasury Note).
If you can borrow at 1.71% and lend to the students as Stafford loads at 6.8%, or lend to the parents as Parent Plus loans at 7.9%, that is not bad business.
That is exactly what the government is doing to the college kids. If only I can open a government as my business.
But why at a time when I can find mortgage rate at less than 3.5%, car loans at 2%, but have to pay an upwards of 7.9% for student loans?
The answer is that Congress, not the market, is the one who sets the rates for federal loans.
There are loans available through private lenders, but Federal loans accounts for 85% of the $1 trillion educational loan outstanding.
The punishing interest rates were set in 2001, when the interest rates for everything were higher.
The result is a nation of college graduates who fell behind their student loan payments. According to Federal Reserve Bank of New York, more than 30% percent borrowers who have begun repaying their loans are at least 90 days behind. Read the full report here and here are the conclusions of the Fed New York report:
- Higher education is an important investment among young workers for better jobs and higher income, but it is accompanied with a growing student debt burden.
- Total student loan balances almost tripled between 2004 and 2012 due to increasing numbers of borrowers and higher balances per person.
- Nearly one third of the borrowers in repayment are delinquent on student debt.
- The higher burden of student loans and higher delinquencies may affect borrowers’ access to other types of credit and the performance of other debt.
What goes around comes around, the high interest rates for student loans are not only creating more debt kids, it is hindering the economic growth for the country too as young people who fell to repay their federal loans on time, are also denied access to credit to buy other things.