Student Debt: Lots of Noise, Little Progress

by Alyssa Oursler | April 10, 2013 1:10 pm

Now that much of the country has finally seen a little spring, countless students — fresh off the sweet taste of sunshine — are starting to count down to summer.

Unless they’re heading to college soon, that is.

As the media has been reporting for months, interest rates are set to double on subsidized Stafford loans once July 1 rolls around — despite the fact that, as The New York Times put it[1] earlier in the week, “no one wants the increase to happen.”

Talk about putting a damper on the coming summer months.

But while both data and common sense support the notion that an interest rate hike is the last thing many debt-drowning degree-seekers need, the fuss (which likely will grow as July approaches) over these “rocketing” rates is looking like another far-too-common student debt story featuring alarming noise, oversimplified stats and little progress.

Big Headline, Small Impact

The aforementioned NYT article reminding us about this hike was published earlier this week, but the rate increase itself has been set for some time.

The College Cost Reduction and Access Act of 2007 gradually reduced the rates for subsidized loans for undergraduate students from 6.8% to 3.4%. The rate cut was supposed to expire last year, but was extended at the last second[2]. Now, it’s about to expire again.

Headlines like “Interest rate on key student loan to double unless Congress acts”[3] make for great theater, screaming that rates will crush penny-pinching kids who just want to learn … but put in context, that lower rate actually was out of the norm. Even the seemingly alarming 6.8% rate is right in line with the interest on unsubsidized federal loans, which won’t change come July, and still is lower than the sometimes double-digit rate on private loans.

Also, as USA TODAY previously reported[4], most loans will be unaffected by the upcoming rate increase. While a third of students have subsidized Stafford loans, rates on existing loans are set for life and thus won’t budge.

A Catch-22 Crisis

An even bigger issue, though, is that we spend far too much time cherry-picking details of the loan landscape and, while there’s good reason for negativity, we seem to find the downside no matter what.

Some — in the wake of so many students over-borrowing, then drowning in debt — are beginning to wonder if student loans are too easy to take out, as the Wall Street Journal recently noted[5]. Also, easily accessible money for tuition often is seen as a factor in rising tuition costs.

That said, I’m surprised we don’t hear more arguments that higher interest rates actually could be a good thing, as they could discourage overzealous borrowing without completely ruling folks out like a credit check might … and thus, work its way out into slowing the spiking cost of college debt.

The bottom line is that it’s a complicated issue — a focus on catchy one-liners that highlight seemingly obvious problems (interest rates are too high!) isn’t the path to progress.

Getting to the Core

Still, such chatter is already underway in terms of the interest rate hike, with many criticizing the fact that our government profits from student loans. Terry Hartle, senior vice president of the American Council on Education, notes, “If the numbers are accurate, the government will make more money on student loans than Ford (NYSE:F[6]) makes on automobiles” next year.

Cars to kids is an apples-to-oranges comparison, and one that he doesn’t break down, though it seems likely Hartle is referring to the total sum of profit as opposed to the actual profitability of loans vs. cars. If so, what sticks out most to me are the huge piles of loans students have to take out in the first place.

Yes, interest rates can add up[7], as compound interest is indeed a powerful force. But interest rates also would add up a whole lot less if we minimized the pile of debt[8] students leave college with.

Right now, the stat being tossed around is that doubling subsidized Stafford loan rates will increase interest costs by more than $5,000 over the life of the loan for borrowers that take out the maximum (for dependent undergrads) of $23,000. (And that doesn’t even acknowledge that independent undergrads can take out up to $57,500[9]).

While everyone is busy comparing the change in interest, they’re overlooking the much larger savings that would be achieved from students taking out smaller loans. To that end, issues like the skyrocketing costs of college that necessitate such loans, and the fact that many people blindly pile into debt to go to schools they simply cannot afford, are equally if not more important than interest rates.

The Bottom Line

This interest rate hike might be the straw that breaks the camel’s back, sure, but then, we’ve been arguing for years that the camel’s back is already broken.

In the end, discussion about this rate increase — which still could be kicked down the road further — is mostly useless chatter that does little more than distract.

The solution won’t be found around the decimal point, but in the much larger picture.

Alyssa Oursler is an Assistant Editor of InvestorPlace.

  1. as The New York Times put it:
  2. extended at the last second:
  3. “Interest rate on key student loan to double unless Congress acts”:,0,2569742.story
  4. USA TODAY previously reported:
  5. the Wall Street Journal recently noted:
  6. F:
  7. interest rates can add up:
  8. minimized the pile of debt:
  9. up to $57,500:

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