May 9, 2012 — It may seem strange for a newspaper that champions education to take this position but we believe the political wrangling in Washington over student loan interest rates is a bogus issue.
In case you aren’t tuned in to the latest great debate, it concerns a projected increase in the interest on new Stafford student loans from 3.4 percent to 6.8 percent.
This issue is perfect for election year campaigning, as shown by the fact that President Obama is leading the charge to hold the rates at 3.4 percent for another year.
First and foremost, what’s so bad about 6.8 percent when the Federal Reserve's benchmark interest rate is roughly zero and home mortgages are going for less than 4 percent?
Let’s face it. Student loan rates are where they are because they’re high risk.
Students put up no collateral that a lender could repossess if the borrower defaults. No one, thank goodness, has figured out how to repossess an education.
The worst part of student borrowing is that about 23 percent of those with subsidized Stafford loans simply walk away and stop making payments.
Private lenders charge higher rates because they take higher risks. It can be 12 percent or more.
And private loans don’t have the advantages of those from the government, like the ability to postpone payments until after graduation or accruing no interest for as long as three years if you can’t find a job.
Or the best one of all – lower payments if your income goes down. Compared with private sector loans, direct loans from Uncle Sam are an incredible bargain, even at 6.8 percent.
This cherished 3.4 percent rate applies only to loans from the school year now ending. Interest rates for previous years are higher.
And if the rate does go up, the difference between the two interest rates on a maximum loan of $5,550 is less than $10 a month.
Moreover, the 3.4 percent rate only applies to about one-third of student loans – those where recipients have an income limit. The remaining two-thirds would maintain rates of 6.8 percent or higher.
Loan subsidies should be fair to students and to taxpayers. This debate is over a $6 billion, one-time fix that will last only one year.
In our view, Congress should be more concerned about the $1 trillion now owed in student loans.
It is costing about half that much to bail out Fannie Mae and Freddie Mac and they aren’t college students.