Having failed to come up with viable solution by the July 1 deadline, Congress has allowed the interest rates on subsidized Stafford student loans to double.
For prospective college students, it’s more bad news on what is already a bleak outlook.
Stafford loans are offered to college students by the Federal governments and come in two flavors: subsidized and unsubsidized. Unsubsidized Stafford loans are available to all students and currently have an interest rate of 6.8 percent. The unsubsidized variety are only available to those with financial need and the government will cover interest payments as long as the student is in school. Thanks to inaction by Congress, the rate on subsidized Stafford loans just doubled from 3.4 to 6.8 percent.
The amount any student can borrow is capped, illustrated by this chart from the Department of Education:
The rate hike only affects new loans and it's still possible Congress could come up with a solution before the new school year begins in the fall. Last year, subsidized Stafford loans made up over a quarter of government issued student debt (including Stafford and PLUS loans). For now, those who qualify for subsidized Federal loans will have to assume the change is permanent.
It’s unlikely that the increased cost of student loans will have much of an impact on actual lending even as college tuition continues its upward trajectory. But is not going to college really a suitable option at this point?
Not that mere attendance is any guarantee of the American Dream. Fifty-two percent of US graduates are now either unemployed or employed with a job that doesn’t even require an undergraduate degree, according to a recent report by the New York Fed. And as the economy continues to amble out of the Great Recession, student debt, for the first time in history, now has the highest delinquency rate of all household debts. That’s a big deal considering that the size of outstanding student debt has quadrupled in the last decade to a over $1 trillion, causing some economists to call it the next great bubble.
Fortunately, a bubble needs to be able to pop. Student debt isn’t forgiven even after bankruptcy and the loans are ultimately guaranteed by the Federal government, so a dramatic cascading crash like the one precipitated by falling housing prices isn’t likely. Unfortunately, that means students unable to secure solid unemployment--a proposition that grows more difficult by the day--have no way of escaping what some have likened to modern day indentured servitude--except, well, death.
It would be easy to blame the situation on ineptitude and inaction from Congress, but the issue isn’t so straightforward. The whole point of Federal loan programs like Stafford is to make college more affordable for everyone. All this easy money, however, has had the opposite effect by encouraging colleges to raise tuitions to record levels, so that any legitimate policy reform would need to do more than simply keep rates low.
Of course, pulling the rug on prospective students in need of financial aid certainly doesn’t help.