Students taking on loans this fall will see their federally subsidized student loan interest rates jump from 3.4 percent to 6.8 percent because of congressional immobility. Subsidized Stafford loans are those on which the government pays interest while a student is enrolled at least half-time and during the six-month grace period following school. These loans are need-based and granted to low to middle-income undergraduate students.
According to the Congressional Budget Office, loans in Denmark, or as the locals like to refer to it – SMS lån – will account for 26.2 percent of all new loans issued in 2020. The CBO claims the rate doubling could reduce spending by $3.7 billion over 10 years. Others are concerned that the increase creates an unfair burden.
The total national student loan debt hovers around $1 trillion dollars. According to a 2012 study by the Federal Reserve Bank of New York, student loan debt has now surpassed both the total credit card and auto loan debt in The United States. The same study says approximately 37 million borrowers have an average loan balance of $24,301.
According to the U.S. Department of Education, 6.8 million federal student loan borrowers have now defaulted on what amounts to $85 billion in debt. To be in default with federal loans means the payer is at least 270 days behind on payments.
There is no simple reason why these debts have become unmanageable for so many Americans, but simple measures can be taken.
Prior to 2010, the federal government guaranteed loans made by private lenders. These loans were made under the Federal Family Education Loan program, a product of the Higher Education Act of 1965. Corporations like Sallie Mae, the largest private loan provider in the country, used private capital to finance FFEL loans while the government paid billions in subsidies and insured private lenders against default.
This arrangement lent itself to abuse. Sallie Mae and other private lenders came under fire for allegations that they deliberately overcharged the U.S. government and may have even encouraged defaulted loans.
Former Sallie Mae employee Mike Zihara said in a 2009 PBS segment that Sallie Mae collectors were coached to deceive borrowers into letting their payments balloon. He said if the borrower were ultimately unable to pay, the taxpayer would cover the bill.
In the midst of the 2007-08 financial crisis, FFEL loans accounted for 80 percent of new federal student loans. As many of these corporations became unstable, educational institutions leaned toward direct loans from the government, such as Stafford, PLUS and Perkins options.
New FFEL loans were ultimately eliminated as part of President Obama’s Health Care and Education Reconciliation Act of 2010, though private lenders continue to reap profits and government subsidies from outstanding FFEL debt that remains.
Now that the government no longer guarantees loans through private lenders and only issues direct loans, Congress must agree on how these loans will be issued. The doubled subsidized loan interest rates effective July 1 is because of a longstanding lack of consensus among lawmakers. The previous 3.4 percent interest rate is part of a four-year reduction, which started in 2007 under the College Cost Reduction and Access Act. In 2012 both Mitt Romney and Barack Obama supported an additional 1-year extension of the 3.4 percent rate.
The latest extension has expired, and it remains to be seen whether Congress can agree on a new interest rate structure in the coming months. Some are downplaying the effects of 6.8 percent interest rates on subsidized loans, saying that it only equates to an additional $20 per month or $1,000 over the life of the loan.
The problem is that many of those who take out subsidized Stafford loans are low-income students. If a borrower is already close to defaulting, a small payment increase could be a death knell. Time magazine calculated that those who borrow the maximum in subsidized loans, $23,000, would pay an additional $5,000 over a 10-year payment plan and $11,000 over a 20-year plan.
Whether victim to predatory private lenders or victim to their own lack of financial experience, student borrowers are drowning in debt.
Many schools do little to educate students about borrowing. The U.S. Department of Education in 2009 identified 218 schools and universities with default rates greater than 30 percent.
What does it look like to live with the threat of default? Jay Hall, 26 years old, earned his degree in 2006. Despite this, he has been attending the University of Alaska Anchorage since the fall 2010. He continues to attend school so his student loan debt remains in deferment — meaning payments are temporarily halted.
When he was 19, Hall took out a $58,000 Lehman Brothers student loan for a technical school in Orlando, FL to train as an audio engineer. By 2007 Jay was paying $500 per month and found it impossible to make ends meet. After returning to Alaska his loan had switched hands and was owned by Wells Fargo.
Hall figured out that he could defer his loan as long as he was enrolled at UAA. If he doesn’t stay enrolled, he faces those same $500 payments. Because of interest, his total debt is back where he started: at around $58,000.
Within a few weeks of failing to enroll for the Spring 2013 semester at UAA, Wells Fargo contacted Mr. Hall and informed him that he was 2-3 payments behind and could be at risk of defaulting.
Hall hopes through hard work doing professional sound he might one day be able to tackle these payments.
What sets student loan debt apart from other types of debt is that it it nearly impossible to have student loan debts, federal or private, forgiven or discharged through bankruptcy. In extremely rare cases it is possible when “undue hardship” can be proven. Some believe lenders acted recklessly in issuing loans, so borrowers should have access to forms of relief like bankruptcy.
Sonya Stein, Director of Student Financial Assistance at UAA, says students need to be in touch with their lenders and educate themselves about payment options. Stein stresses that with research, students can pay a sizeable amount of their costs through scholarships.
Need-based programs like the Alaska Advantage Grant and the federal Pell Grant have recently seen increased allocations. Since fall 2012, $2,466,000 has been disbursed as Alaska Advantage Grants and $16,067,059 as Pell Grants. Stein believes this sets Alaska apart from other states in the nation.
“Being someone who over-borrowed myself, that’s where I get some of my passion for what I do,” Stein said.
In 2011 UAA had a loan default rate of 8.2 percent for students in a 2-year cohort, meaning those who entered repayment during fiscal year 2011 and defaulted in either FY 2011 or FY 2012. The national default rate for 2010, the latest available, was 9.1 percent.