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How the Recent Debt Downgrade Could Affect College Students

Oct 12, 2011 Jennifer Williamson, Distance Columnist | 0 Comments

Directly after the government signed into law a sweeping debt deal instituting broad cuts in numerous federal programs, including federal student loan programs, Standard & Poor’s downgraded the country’s credit rating from AAA to AA+.

It might not sound like a big change—but AAA is the highest credit rating a country can have, and downgrading the US debt is a major historic event. It’s never happened before in the history of the country—and it reflects the rating organization’s low level of confidence in the current state of US government.

How this will affect college students—or the public at large—is difficult to say, as this has never happened before in US history. However, there are a few likely predictions—all of which point to higher costs for students. Here’s an overview of how the debt downgrade could affect you.

Higher interest rates on federal loans

Business Man Tumbs Down

Managing your money is never easy in college. Between living expenses, student loans, and the high cost of books and other supplies, many students are strapped for cash.

Lenders set interest rates based on trust. The more they trust a borrower to pay back the loan on time, the lower the interest rate is. The federal government can afford to set very low interest rates on its student loans because it’s getting charged even lower interest by its lenders—because the US government is one of the most trusted borrowers in the world.

At least, it used to be. With the debt downgrade, it’s possible that international lenders will view the US government with more distrust—and will have to increase its interest rates. The US government is likely to pass that cost along to students in the form of increased student loan interest. Stafford loan interest is already set to increase next year from 3.4% to 6.8%--and it’s possible that rates will continue to rise as a result of the debt downgrade.

Higher interest rates on private loans

Private student loans already have high interest rates compared to government loans—sometimes as much as 18%. But it’s possible that with the increases in federal student loan interest, private loan interest will rise as well.

Reduced college savings

Directly after the downgrade, the stock market crashed over 500 points. This is sure to have taken a chunk out of college savings accounts for students and their families all over the countries, many of whom had invested in 529 savings plans. It’s possible that the debt downgrade could have a long-term negative effect on the economy—meaning that those savings accounts may not recover any time soon.

Increased credit card interest rates

It’s likely that interest rates will spike across the board for many different kinds of loans—including credit card loans—in addition to student loans. Many students carry more than one credit card—a result of credit card companies’ aggressive marketing on college campuses, although the 2009 Credit CARD Act limited the companies’ ability to market to college students. Even so, it’s not unusual for college students to carry more than one card—and increased interest rates will definitely affect them.

College is already expensive—and the debt deal has done a lot to increase student costs over the next few years. It’s likely that the debt downgrade will make the situation worse—leading to an increase in interest rates for both federal and private student loans. It’s already led to a dramatic stock market downturn that has affected college savings accounts nationwide, and it’s quite possible that the economy will recover slowly if at all—meaning that those savings accounts may not recover quickly. As a college student, now is a good time to research ways to reduce your debt burden as much as possible—by earning as much as you can in scholarships, and possibly by choosing a less expensive school.



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