Raquel

Raquel

Increased Interest Rates on Federal Student Loans
On July 1 of this year, the rate on new, federally subsidized student loans increased from 3.4 to 6.8 percent. Leading up to the increase, legislators tried and failed to work out a deal to keep that rate lower. Finally, on July 18th, a bipartisan group of senators announced an agreement on student loan packages. During a time when student debt is steadily increasing, and the job market for new graduates continues to remain lukewarm, this particular issue is something to which we should all be paying close attention to.

 

How does high student debt affect graduates and the greater economy?
Recent figures estimate that nearly 37 million Americans have some form of student loan debt, and, according to many sources, the total amount owed is at the $1 trillion mark. High student debt and low paying jobs prevent graduates from reaching financial goals, such as financial independence, homeownership, and retirement saving. These factors have an impact on the greater economy, which relies heavily on consumer spending to fuel its engine. This particular generation, the “Millenials,” are faced with higher student loan debt than any other in the past. These individuals, who are not able to fully become independent citizens, are not helping an already anemic recovery. According to the Census Bureau, the percentage of men between the ages of 25 and 34 who are living in their parent’s home increased from 13.5 to 16.9. The rate for women also increased—from 8.1 to 10.4 percent. The housing market’s current recovery is not being led by first-time homebuyers, further pointing to the financial roadblocks that young people are facing these days. Unfortunately, the ultimate impacts of this trend will not be immediately evident.

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Image credit: R.J. Matson

How will high student debt continue to affect graduates and the greater economy?
We will continue to see repercussions for years, even generations to come. As student debt follows graduates into their later years, it will affect their purchasing power, ability to start up their own business ventures, and ultimately paying for their own children’s college education. It’s important that, as a society, we begin to take a hard look at both the ways of financing a college education as well as the escalating costs. Tuition rates have been soaring—outpacing medical and cost-of-living inflation over the last 30 years. At the current rate, neither is sustainable in the long term. If we want to continue on a path of economic prosperity, it’s important to tackle these issues now, before they become part of a broader, more long-term problem. The rate of student loans is only part of a broader college affordability issue.

 

What does the new Senate bill mean for student loan rates?
The bipartisan approved agreement caps rates at 8.25 percent for undergrads and 9.5 percent for graduate students. The borrowing rate would be tied to current interest rates and would lock in the surcharges paid to the government for administrative costs. The proposal is also backed by the White House. This agreement is favorable for students now due to historically low interest rates. For instance, if the agreement is voted on and approved, students taking out new loans for the fall semester will pay 3.86 percent. However, in the future, as the economy continues to recover, we can expect rates to increase which would mean higher rates for borrowers which could exceed the current rate of 6.8 percent—not exactly a better option as far as I’m concerned.


About Raquel Frye

Raquel Frye is the Associate Director of the Regional Economics Studies Institute (RESI). RESI is considered a leading expert on Maryland’s economy and is responsible for providing economic consulting services for public and private clients across the State. An enthusiast of economics and economic education, Raquel’s posts tend to focus on analyzing the economics of policies and current news stories (with a little econ humor thrown in for good measure).

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