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Student Loan Interest Rates Set for Increase

This article was written by in Education. 10 comments.


Unless Congress acts soon, student loans subsidized by the government will become significantly more expensive. Mandated interest rates on subsidized student loans will jump from 3.4% to 6.8% for the 2012-2013 school year. With unemployment still high for recent graduates, increased interest rates will add to the debt burden. Tuition costs are still increasing as is the cost of living.

Without a job or in other economic hardship, an individual with student loan debt can defer payments. Student loan deferment delays the debt without increasing the amount of interest owed on the loan.

College studentsThe availability of easy credit for education has certainly helped a larger segment of society obtain an undergraduate degree, but it has also encouraged institutions to raise prices. Knowing that the market can continue to bear significant increases in tuition, there is no end in sight for these climbing fees.

Going into debt to receive a college education and degree has become the norm. It is possible, however, to go to college without getting into debt. Author and University of Massachusetts alumnus Zac Bissonnette has explored this idea, as we’ve discussed on an earlier podcast.

Cancelling the planned student loan interest rate increase, scheduled to go into effect on July 1, has a cost to taxpayers. The public is subsidizing these loans — so the financial institutions that offer the loans to students can continue to profit while students are in school. According to lawmakers, this subsidy at the low interest rate costs the government $6 billion a year.

Both Barack Obama and Mitt Romney support extending the lower interest rate, with the Democrats saying they could pay to extend the lower interest rate by changing the tax code to require small business owners who file their taxes for a business entity classified as an S Corporation to pay self-employment taxes on the full business income.

Thanks to the availability of student loans and the G.I. Bill, college education is attainable for everyone who wants it. But as the percentage of college graduates within the American population has increased, the ability to use that degree to differentiate oneself in a competitive employment marketplace has diminished.

Meanwhile, the cost to attain that degree has continued to increase with no end in sight. Some might argue the quality of that degree in general has decreased as well, and question whether a degree is worth the investment of time and money. The perceived reduction of value draws students and their influential parents to better-branded institutions; if the degree itself can’t differentiate someone from a crowd, perhaps a degree branded with Harvard or Yale will set the student apart.

Extending the low interest rates will keep a college education more affordable for families who need financial aid and will emphasize the idea that a college education is important for every individual who wants the sociological and financial advantages that the degree might provide. It won’t solve the problem of ever-increasing costs to attend college.

Photo: Pink Sherbet Photography
CNN, New York Times

Published or updated April 25, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Jim

“Knowing that the market can continue to bear significant increases in tuition, there is no end in sight for these climbing fees.”

I don’t agree with the idea that colleges are just jacking up prices “because they can get away with it”, if thats what you’re saying there.

Public colleges are primarily funded through government tax dollars. A key reason tuition rates have gone up faster than inflation in the past few decades is because of decreased state tax spending on higher education. My alamater just lost $300M in state funding and ended up raising tuition 10% because of it. Because public universities typically get 70-90% of their money from forms other than tuition then a drop in the tax funding can have a much higher impact on tuition. Their spending went down. It has not as been that drastic in most of the past 2-3 decades but there has been a gradual erosion of state tax dollars.

THe full retail sticker price of tuition may have gone up 8% a year but the amount students actually pay hasn’t gone up as fast due to financial aid. The amount colleges spend per student has only gone up around 4% a year. THe big difference is that tuition is accounting for a larger % of university revenues due to lower tax funding.

Private colleges may be jacking up tuition along with the market. But if someone wants to pay a private college $30k+ for tuition instead of $8k at the public in state university then whine about how expensive their tuition is then I don’t have any sympathy. If someone wants a tax subsidized education then thats what public colleges are for. Oh, BTW, private colleges get 10-25% of their money on average from tax funds too.

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avatar Luke Landes ♦127,550 (Platinum)

Excellent comment, Jim. States aren’t pulling in revenue from taxes, and there’s less public money for education all around — and state colleges and university and public school districts. And it’s a great point that while the cost of tuition increases far beyond the rate of inflation, what students and their parents actually pay doesn’t increase as fast due to the availability of grants and scholarships. You could actually go to an “expensive” private university for less money than many public colleges due to the many options available for offsetting tuition. One Ivy League school — can’t remember which one off hand — offered free education for students whose family’s income was below a certain level, a deal that you weren’t going to find among most state colleges, where the expected family contribution my be zero but loans would be required for the full cost of attending.

Still, if colleges couldn’t get away with increasing tuition, they wouldn’t. Here’s an article that talks about the price elasticity of tuition. (Ron Lieber from the New York Times.)

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avatar jim

Actually I think almost all of the Ivy’s offer the deal where they’ll cover costs for families who can’t afford the full bill. But they’re more generous than most private schools. The average need based grants at private schools averages far short of covering their high tuition. Many states offer pretty good financial aid for low/moderate income families. Georgia has a scholarship deal that promises free tuition to anyone in the state if they maintain certain grades. I got much better financial aid from my public in state school than any of the private colleges offered. Of course the aid levels vary from state to state. All in all, outside of Harvard, I think you’re a lot more likely to afford public school than a private school even with aid grants considered.

The article makes some valid points about how university politics and university budgets are a world apart from normal business budgets.

Side comment :
I was reading the NYT article and I got to the point of the quote : “Couldn’t Lafayette lower costs by demanding that the faculty perform less research and teach one additional class?” and that made me laugh out loud. I laughed because I thought of my alma mater which is a large public university. Research grants accounted for ~50% of the income and tuition covered ~10%. So abandoning research to lower costs would be stupid and wipe out half their funding. They do that research specifically to make money from grants. Thats the point.

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avatar Squeezer @Personal Finance Success

I’m able to pay for college myself without the aid of student loans. I am working full time and taking 2 classes each semester, using my salary to pay for books and tuition. Yes it will take me longer to graduate, but I’m not incurring any debt.

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avatar Jenna, Adaptu Community Manager

So thankful I’m out of college now. Not sure how families with kids are going to pull of school with such an increase in costs.

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avatar Mike

I wish these colleges would spend more on class equipment and less on useless things. My last two colleges spent more on yearly lawn replanting and student entertainment centers. Of-course, tuition rates increased.

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avatar tigernicole86 ♦55 (Newbie)

I went to a private school in Ohio known more for their basketball team and engineering program(and trying to not be known for the student neighborhoods known lovingly as the “Ghetto” and the “Darkside”. Essentially, you’d know if you went). I was fortunately able to end up with less than a years worth of just tuition worth of loans. But now that my small school has plans to take over much of the urban space that had been abandoned by a large company, they have raised tuition to such a level that I couldn’t fathom even being able to pay for it now. I already have some loans that are at that 6.8% for federal loans and I have friends who had to take private loans at even higher rates. And the interest hurts. A lot.

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avatar shellye ♦107 (Cent)

To add to Jim’s comment above; public universities are funded primarily by taxpayers, this is true. However, in the great state of Texas, our public schools also get money from the land grant oil money, and have been since the schools’ inception. AND tuition prices STILL GO UP 10-15% each year. My student got a number of grants and scholarships that have covered her books, tuition and fees for the first couple of years. We’ve been fortunate enough to not have to rely on student loans yet. (knock wood). I pray we won’t, but we’ve got another kid in college in two years, and I don’t see any relief in sight coming from the financial aid offices.

I have a friend whose husband has about $57k in student loan debt that they’ve been deferring on for years. Eventually that will come to an end and I have no idea how they’ll afford the payments.

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avatar Jim

I don’t know what Texas university your student went to. But here’s good data on UT Austin and I suspect other state schools have similar funding situation :

http://www.utexas.edu/finances/money-from.html

Tuition accounts for 25% of their revenue.
The permanent university fund which gets the money from oil, etc is supplying just 7% of the university’s budget.
And they say : “”The state, once a primary source of funding, now supplies a small fraction of public university budgets — about 14 percent at The University of Texas at Austin this year. Three decades ago, in 1981, state support amounted to 52 percent of our budget.”

They are also talking about a 5% budget CUT. So its not as if they just keep spending money either.

Texas seems like a great example of how fewer tax dollars are squeezing the budget.

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avatar Zach from DSO

This just piles on another reason why online schools and local cheap options are growing. Strayer’s enrollment was way up this quarter. We just paid off my wife’s 6% student loan for her Masters degree. If we didn’t think we could have paid it off within 6 months of her completing the program she would never have attended the school she did. I think people are going to continue to move towards lower cost options.

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