Student Loan Debt: What Stafford Loans’ increased interest rates mean for students and the future of financing college

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By Laura Pereyra
NerdScholar

On July 1st, Congress let the interest rates of Stafford Loans double to 6.8%. Now that they have returned from the 4th of July recess, the debate about student loans is growing louder and has prompted students and families to worry more about repayments.

At issue is not only the recent doubling of Stafford Loans, but also the rapidly rising cost of higher education and the way in which student loan debt negatively affects the economy.

Many recent college grads are grappling with student debt they cannot afford and in turn are delaying buying homes and cars, putting themselves at the fringes of the economy. But what does this mean for students and what can they do about it?

NerdScholar turned to financial aid administrators and student loan experts to learn what the recent doubling of student loan rates means for students before colleges start sending their tuition bills for the 2013-2014 academic year.

Higher costs for student consumers

As of now, if the rates stay doubled students borrowing Stafford loans for the next and future school years will have to pay an additional $2,600. This means that students who are new borrowers would be paying between $30-40 additional dollars each month when they repay their loans.

Although the monthly figure might not seem as daunting, students are going to end up paying more regardless, preventing them from putting that money into the economy, towards cars and other consumer goods.

Cathy Fuller, Associate Director of Financial Aid at Marlboro College put it this way, “Even if it is $30 more a month, that is $120 per year that could be contributed to the economy in one way or another. I don’t look at the situation as being bad or good; I’m looking at it as it costs more money, period. I grapple with the fact that the federal government is lending money to financial institutions at a fraction of what they are charging in interest to students who are only trying to further their education.”

In fact, while students pay a 3.4-6.8% on their student loans, banks can borrow from the Federal Reserve at rates as low as .75%.

Senator Elizabeth Warren has thus introduced the Bank on Students Loan Fairness Act, which would allow students to borrow funds at the same low rate that banks borrow from the Federal Reserve for a year, providing a window for Congress to find a more long-term solution on student loan interest rates.

To further clarify the recent unfolding of student loan debate events, Mark Kantrowitz, publisher of Edvisors Network, emphasized, “Doubling the interest rate does not double the payment. Most loans are unchanged. This affects only new loans, not old loans. There’s also a lot of confusion about the difference between variable rates and fixed rates…While the federal government has been improving the disclosures about college costs and financial aid, better disclosures are not enough. Students and their families need the tools and skills to help them evaluate the disclosures so that they can make more informed decisions about the tradeoffs between college affordability and college quality, so that they can make smarter borrowing decisions.”

More financial literacy awareness and transparency

One of the root causes for the current student loan crisis is related to poor financial literacy and lack of transparency. Students have difficulty finding alternative ways to fund their education rather than borrowing student loans.

From no financial literacy at an early age to no adequate education about the terms of student loans, students have to navigate the quagmire of convoluted information available.

Many financial aid administrators and experts, including Marlboro College’s Cathy Fuller, believe that there is a heavy financial literacy problem.

Most college students might take student loan exit counseling at the end of their senior year, a time when they are already stressed out with finals and finishing college, which makes it very hard to actually focus and learn in a short amount of time how it is that they are supposed to pay back what they borrowed. The early and frequent implementation of financial literacy is likely to help.

Overall, it might seem like student loan counseling is not enough. Kantrowitz said how, “…[a] review of the term of the loans, [is] not even personalized to the individual borrower. There is no evaluation to verify that the material was comprehended and retained by the borrower. Exit counseling is provided only to students who graduate, not students who drop out. Perhaps that contributes to the four-times higher default rate amount students who drop out. Providing more frequent counseling– every time a student borrows a new loan– might increase students awareness of their debt and help them know their options and make smarter borrowing decisions.”

There are some colleges that make student loan education more frequent so their students learn what they are getting themselves into every time they borrow.

Sheryl Mihopulos, Assistant Vice President of Student Financial Services & Financial Aid Compliance at Adelphi University, says, “ Adelphi University is proactive and sends loan repayment information with every award letter. All staff in the Office of Student Financial Services can advice students where to look and obtain the necessary literacy information.” In other words, in addition to schools providing more frequent updates about financial aid award letters and repayment info, students must also be attuned to the consequences of borrowing student loans.

Eyra A. Perez, Executive Director of San Antonio Education Partnership, and Noe C. Ortiz, Director of Financial Aid at Alamo Colleges agree that there could definitely be more awareness and transparency. “If you wait until the student is starting college, the critical consideration that must be given to how much a student will borrow could be lost in the excitement of the transition.

However, there is student debt counseling/advising that occurs on our college campuses to help students avoid unnecessary debt,” said Noe Ortiz, Director of Financial Aid. Despite this counseling available, students might still not be fully aware of what they sign up for when they sign their student loan promissory notes to pay for college.

That is why the Financial Aid Council of San Antonio’s college affordability initiative is based on knowledge creation for students and parents.

According to Eyra A. Perez, SAPE’s Executive Director, “We believe that the “education” of student debt must start much sooner! It must start at the earlier grades. Students and parents must be made aware of the challenges of borrowing too much for their college education. They must be taught about “other ways to pay” for college such as dual credit courses, Advanced Placement, scholarships, savings plans, and 529s.”

Moreover, they have a program called “cafecollege,” which was founded by the City of San Antonio under the leadership of Mayor Julian Castro that serves as a “one-stop-shop” for college access advice and workshops. Parents and students can come and ask questions about how to fund their college education.

If there is earlier education a lot of student loan debt problems could be prevented from happening in the first place. But for those who had no choice but take loans, they must become aware of how much and at what interest rate they are borrowing in addition to learning their repayment options.

Repaying student loans

The main problem with student loans is that many students have payments that they simply cannot afford. Students are suffering and so is the economy. However, because student loans are something that you cannot escape, not even in bankruptcy, it is imperative that every student learns his or her options.

If a student borrows student loans from the federal government there is income-based repayment, where students can qualify to pay only up to 15 percent of what they earn, for example. As their salary increases, the amount that they pay increases. There are other federal loan repayment programs students can learn about at the U.S. Department of Education’s website here.

Additionally, there also is loan consolidation, which students can also do if they have private student loans. This can be done at many banks, including credit unions that tend to have lower interest rates. Students can use NerdScholar’s student loan calculator to assess whether consolidation is a better option here.

Laura Pereyra is a Communications Analyst at NerdScholar, brought to you by NerdWallet, a company focused on empowering young adults and students to make wiser financial decisions and maximize their education investments.

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