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The real question behind July 1 rising student loan interest rates

Student loan rates rise
Student loan rates rise
Photo by Mario Tama/Getty Images

College costs for the coming school year rose July 1 for students and parents borrowing from federal loans, The New York Times reported yesterday. Interest rates for Stafford and PLUS loans are set for the upcoming academic year every July 1. They jumped from loans issued during the 2013-2014 school year at a rate of 3.86 percent to 4.66 percent for loans taken out in the 2014-15 school year. The rate remains fixed over the life of the loan.

The interest rates of federal student loans are tied to the spring rate of the 10-year Treasury note, according to a law passed last year. The Bipartisan Student Loan Certainty Act 0f 2013 temporarily lowered the prior fixed rates but was a double-edged sword. As the economy improves, rates will continue to rise for loans in subsequent years, making it difficult for borrowers to estimate, prepare for, and afford college costs.

How much more in $

Both students and parents often borrow to help pay higher education costs. The increase in interest rates affects the family’s future financial situation. There is also an additional fee charged for taking out each loan.

“A $5,000, 10-year loan at last year’s 3.86 percent rate would cost about $1,035 in interest; at 4.66 percent, you’ll pay $1,265, a difference of $230,” according to The New York Times. Stafford loans for graduate students rose from 5.41 percent to 6.21 percent. Rates for PLUS loans, for graduate students and parents of undergraduate students went from 6.41 percent to 7.21 percent. However, many parents and grad students borrow much larger amounts and parents often repay over a longer term which vastly increases their borrowing costs.

The real issue

There are two issues behind the real question about interest rates. The first is the federal government considers loans as a form of financial aid to help families afford higher education. Prior to last year’s law change, subsidized Stafford loans awarded to those based on financial need had a lower interest rate than unsubsidized Stafford loans awarded without regard to financial need. Now there is no difference in interest rates and student debt has reached record highs. This affects young adults’ ability to become independent and self-supporting, moving out of parent homes and affording their own.

The second issue is about the growing importance and need of a college degree to achieve success in a technological world. The added benefit is an educated citizenry is better prepared to understand and resolve complex economic, political and social issues facing the nation and the world.

Wanting to help educate students that are a necessity for local, national and global success leads to an underlying key question for current and future college-bound, their parents and the general public. Should there be interest rates on federal financial aid for student and parent borrowers or is repayment of amounts borrowed sufficient?