Federal Student Loan Interest Will Double in 2012: A Good or a Bad Thing?

Has anyone noticed that federal student loan interest is set to double in 2012—from 3.4 to 6.8%? Actually, it’s only going up to where it should be, if you ask Congress. Originally, student loan interest rates were reduced temporarily, and the plan was always to bring them back to normal levels by 2012.

Still, for students already struggling with debt, this is a huge jump—and it’s surprising that it hasn’t been more controversial and heavily reported. But there are benefits to raising student loan interest rates that make it difficult for Congress to backtrack. Here’s a look at the pros and cons of this legislation—and why even supporters of lower college costs may not want to draw attention to it.

It’s not so great for students

That’s the first thing most people point out—that students already struggling with debt will be hit hard by this legislation. Bigger student loan interest rates means higher monthly payments and longer loan terms. It means students could be working years longer to pay off loans—and paying thousands of dollars more per year. And it means that the student loan crisis
in this country will probably get worse, not better.

Like it or not, it may be that the student loan interest rate hikes are here to stay.

It helps the federal student loan program

Perhaps student advocates haven’t been calling for attention to this issue because the new student loan interest rates will go toward funding Pell grants and other federal aid programs. It’s possible that keeping student loan interest rates low could lead to bigger cuts in other places in the federal student aid budget. This could mean low-income students have fewer options to pay for college, and fewer people will be eligible for Pell grants and the lowest-interest federal student loans.

It affects student borrowing in the future, not now

The interest rates will only go up for loans originated in 2012…not for existing loans. This means that many of the students affected are probably still in high school right now. Because it affects existing college students less, you don’t hear as much of it in the news and in Occupy Wall Street demands. In addition, the changes will only affect students’ ability to repay once they graduate, so the true effects of this legislation won’t be felt for several years to come. It’s possible older students and recent graduates feel they have more pressing issues to talk about.

It could tempt more students to go for private loans

The typical advice is that students should avoid private loans until they’ve completely exhausted their options for federal loans. But a 6.8% interest rate makes some private loans look better on paper than federal loans. It’s not unusual for private lenders to offer lower interest rates than the federal rate at first—but don’t forget that those are variable interest rates, and your interest rate will jump—probably to more than 6.8%. If you can still get a federal loan, even at the higher interest rate, it’s a better deal over the long term.

There’s no question that it’s a bad time to raise student loan interest rates. With unemployment for recent grads at over 9%, students are struggling to pay back debt—but it’s difficult to predict where the economy will be in four or five years, when most students who take out federal loans at the new interest rate will really start to feel the effects.  And the government may need the money now to finance the Pell grant program and other programs that help low-income students pay for college. Like it or not, it may be that the student loan interest rate hikes are here to stay.

Sources:

Washington Times: Lenders Fears Could Raise Interest on Student Loans
New York Times: Student Loan Debt: Who Are the 1%?
Distance-Education.org: Private vs. Federal Student Loans