Student Loans Just Got More Expensive, But Can Elizabeth Warren Help?

Source: Thinkstock

Source: Thinkstock

For students taking out loans and starting college, or are still years away from graduation, there was some bad news given today. Don’t tear up your books and head to the closest bar just yet, young learners. While interest rate news is far from good, and yes, the relief legislation is somewhat controversial — with Senator Warren’s student debt bill — statistics still show that a college education is worthwhile. Yes, 62 percent of grads leave public universities with student loans, according to The Project on Student Debt — and yes, average debts were at $29,000 per student last year, according to CNN Money.

But even so, college graduates earn more than $17,000 over those with just a high school education, according to Pew Research, which states that, “On virtually every measure of economic well-being and career attainment — from personal earnings to job satisfaction to the share employed full-time — young college graduates are outperforming their peers with less education.” Now that we know the positives, let’s take a look at these two Congressional items impacting student loans and what it may mean for young pocketbooks.

Interest Rate Increase

Interest rates are headed for an increase this year and next for student debt. Stafford loans are set to reach 6.21 percent in July, up from a 5.41 percent rate last year, which was a marked decrease from the years before that. Why such a dip, and now such an increase? Unsurprisingly, it has to do with the scale-back on the Federal Reserve bond purchasing program. Whereas recent years had the borrowing costs reduced because of federal purchases, it’s not surprising that interest rates are going up. As Mark Kantrowitz, publisher with Las Vegas college financial-aid websites, told Bloomberg, “It was a given that they’d start increasing,” saying that Treasury yields “had nowhere to go but up.”

This hints at the perhaps worse news: this isn’t the end of the increase. Rates are likely to continue to rise as tapering continues, so students will face growing interests rates as time goes on. Pairing this with the particularly high and increasing unemployment rate in young adults and college graduates, its clear that many young graduates will find themselves on shaky financial ground. Recent graduates are seeing 8.5 percent unemployment compared with 5.5 in 2007, and 16.8 percent underemployment compared with 9.6 percent in 2007, according to a report from the Economic Policy Institute.

What this percentage increase ends up meaning more specifically is that those student who take out a $5,500 government loan for one year will see approximately $260 more in interest payments. If they do so for four years of college, that will end up being an added cost of $1,650 in interest on their loans, according to CNN Money.

Student Debt Bill

In more cheerful news, Senator Elizabeth Warren brought a new bill to the Senate, which enables students with loans financed at rates that are higher than today’s interest rates to refinance. “When interest rates drop, people can refinance their home, they can refinance their business debt. It’s regarded as a smart move for any consumer or business. But student borrowers are prohibited from doing that under most programs,” said Warren to MassLive. “This bill says we’re going to change that and let them refinance that down to current low rates.”

Not everyone is in agreement that this is the right move to aid students dealing with debt, and that giving students the same advantages that large banks get isn’t a realistic solution. While the bill is advantageous in that it caters to a group who is clearly struggling more than most with debt, many say that it is unlikely to get through Congress — making it more of a political strategy against Republicans, than a success for students.

There have also been other moves to aid student in dealing with debt after school, specifically from the Obama Administration with a student loan reform that makes it so “borrowers will pay no more than 10 percent of their disposable income,” and offering debt forgiveness for certain professions. Even so, there’s no question that student debt is more of a problem today than it has been in the past, with debt increasing and the job market still suffering.

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Follow Anthea Mitchell on Twitter @AntheaWSCS