NEW YORK – Interest rates on government-funded student loans are due to increase this summer and are projected to continue to rise for the next decade, according to a Congressional Budget Office analysis.
College students who take out government-funded, tuition loans are likely to see the interest rates on their student loans increase by nearly 1 percent July 1, with rates by 2024 likely to be from 2 to 4 percent higher than current rates.
The sharp rise stems from a change Congress mandated last year requiring the rate new borrowers pay for the term of the loan to be set each July 1. The rate for new student loans is to be adjusted based on the last auction in May for the 10-year Treasury rate.
Congress mandated the change in July 2013 when Treasury was prepared to double the interest rates. Congress members panicked, realizing they faced a massive public relations problem, and responded with the current fix, which locks in interest rates to a formula for 10 years and establishes caps.
Anticipating that the 10-year Treasury is only going to continue to rise over the next decade, Congress capped federal student loan rates at 8.25 percent for undergraduate Stafford loans, 9.5 percent for graduate Stafford loans and 10.5 percent for Direct PLUS loans.
The CBO’s April baseline projections for the student loan program sees rates on the 10-year Treasury rising 1.23 percent this year and 3.19 percent by 2024.
Forbes reported May 7 that the rate was based on the Treasury’s sale of $24 billion of the 10-year note at a yield of 2.61 percent, 0.8 percent higher than the 1.81 percent yield produced in the 10-year note auction at the same time in 2013.
“Since this is the yield upon which federal student loan interest rates are based, Wednesday’s results mean that federal student loan interest rates will also rise by 0.8 percent,” Forbes reported.
Forbes projected that the interest rate for the Stafford federal loan for undergraduate students will rise from the current 3.86 percent to 4.66 percent for loans disbursed July 1, 2014, until June 30, 2015. Forbes further noted the 0.8 percent rate increase will apply both to subsidized Stafford loans, in which the interest does not accrue while the student is in school, and unsubsidized Stafford loans.
Forbes further projected that direct, unsubsidized Stafford loans for graduate students will increase from 5.41 percent to 6.21 percent for loans disbursed, starting July 1. Direct PLUS loans, available to parents or graduate students, will see the existing 6.41 percent fixed rate increase jump to 7.21 percent in July.
A looming crisis in student loan debt?
The Federal Reserve Bank of New York documented in its “Quarterly Report on Household Debt and Credit” published in February that outstanding student loan balances increased to a total of $1.08 trillion as of Dec. 31, 2013, representing an increase of $114 billion for 2013.
The February Federal Reserve Bank of New York report further documented that 11.5 percent of student loans are 90 days or longer delinquent or in default, with the amount of heavily delinquent student loans hitting a new record of $124.3 billion, up from $121.5 billion in the previous quarter.
By comparison, total credit card debt was 686 billion in the same period, at the end of Dec. 31, 2013.
With 37 million Americans estimated to hold student loan debt, student loan payments can top $1,000 a month, putting a drag on the ability of college graduates to begin making mortgage payments or building equity by investing in stocks and bonds. The standard student loan repayment schedule typically is 10 years or longer.
William Elliott III, Ph.D., an associate professor at the University of Kansas and founder of the Assets and Education Initiative in the university’s School of Social Welfare, co-authored a study for the Federal Reserve Bank of St. Louis in which he argued student loans contribute to a wealth gap. He showed that the median 2009 net worth for a household without outstanding student debt was $117,700, nearly three times the $42,800 net worth of a family with outstanding student debt.
Elliott’s study further documented that the burden of student loans falls more heavily on lower-income families, with outstanding student loan debt representing 24 percent of household income for households with income less than $21,044 in 2010, compared to 7 percent for households with income between $97,586 and $146,791, and 2 percent for households with incomes of $146,792 or higher.
“Student loan delinquency and default have negative consequences for the borrower and may have negative consequences for the society as a whole,” Elliott argued.
“For example, in 2011 the U.S. Department of Education spent $1.4 billion to pay collection agencies to track down students whose loans are delinquent or default. The high percentages of student loans in delinquency or default might have led some in the popular media to speculate whether student loans represent the next financial crisis for America.”
WND has reported that the projected rise in interest rates may risk bursting the current stock market bubble in which the Dow Jones Industrial Average has in recent months set repeated new record highs, closing above 16,000.
The risk for those repaying student loans is that a renewed economic downturn precipitated by rising interest rates could reduce the economic opportunities borrowers depend upon to generate earnings from which to make loan repayments. For future borrowers, rising interest rates will both increase the cost of student loans and make it less likely that lucrative job opportunities will be readily available upon graduation.
Is college worth the financial risk?
Perhaps for the first time since the end of World War II, the United States has produced a generation, known as “Millennials” born around the year 2000, that have begun questioning whether or not a college education is worth the financial risk.
The first financial risk college students for college students who take out a federal tuition loan is that they might not graduate.
A study by the National Student Clearinghouse Research Center showed that 44 percent of first-time degree-seeking students who enrolled for college studies in the fall of 2007 failed to complete a degree or certificate within six years. Only 11 percent of exclusively part-time students were still enrolled at the end of six years.
Second, many college students with an outstanding federal student loan repayment obligation may fail to find a satisfactory job upon graduation.
A 2013 study conducted by the Center for College Affordability & Productivity found that 48 percent of employed U.S. college graduates are in jobs the Bureau of Labor Statistics suggests requires less than a four-year college education. Meanwhile, the proportion of overeducated workers in occupations has grown since 1970, when fewer than 1 percent of taxi drivers and 2 percent of firefighters had college degrees. Today, more than 15 percent of taxi drivers and firefighters have college degrees.
The study further found that projected future growth in college enrollments and the number of graduates exceeds the actual or projected growth in high-skilled jobs.
“Can we afford to expend $100,000 or more in resources giving kids a college degree, only to see them take taxi driver jobs for which the college education added hardly a scintilla of employment skill?” the report’s authors asked.
“Perhaps the federal government should reduce its involvement in the higher-education business, much like some states seem to be starting to do out of fiscal imperatives imposed by budget-balancing requirements that the federal government does not face. If fewer students could get Pell Grants or subsidized student loans, enrollments might well fall, an outcome we perceive not to be a bad thing from a labor-market perspective.”
The authors left no doubt the traditional wisdom that a college education assured a brighter financial future was now in doubt.
The report concluded: “Reading stories of underemployed college graduates with massive debt, more will start rejecting the mantra that everyone should go to college.”