New York, NY (PRWEB) July 31, 2012
Is cutting the interest rate on subsidized Federal Stafford Loans in half a solution to the Student Loan bubble or merely a political expedient? Earlier this month, Congress voted to freeze interest rates on such loans at 3.4% (half of the 6.8% rate in 2011) through 2013, extending the original July 1, 2012 deadline. This move delays any real solution until after the presidential election this fall.
According to the most recent data available published by Consumer Credit Default Indices, default rates for student loans jumped 2% between 2008 and 2009 to more than 9%. Various sources estimate an additional 10% of student loans have not been declared in default, but are in distress. The N.Y. Fed estimates that total student debt, which exceeded $867 billion in 2009 and has continued to climb through 2011, currently exceeds $1 billion, with a default rate of more than 10%. There is increasing concern that there could be as large a bubble in student loans as there was in real estate mortgages.
It is clear that remediation is necessary, by both lenders and borrowers. Jason Delisle, Director of the Federal Education Budget Project at the New America Foundation, points out that keeping interest rates on federal student loans comes at a great expense to taxpayers. The extension granted on subsidized Federal Stafford Loans only applies to a finite group of borrowers seeking new loans, and only saves them an average of $1,000.
Mr. Delisle suggests a solution that would apply to federal subsidized and unsubsidized loans, pegging interest rates to 10-year Treasury bonds and adding 3 percentage points. The blended interest rate would currently be 4.5%, effectively lowering the rate for a majority of students who hold unsubsidized federal loans, while only slightly increasing it for the minority with federal subsidized loans. Although interest rates are expected to remain low for some time, taxpayers would be protected if rates began to rise.
“Mr. Delisle’s proposal deserves scrutiny since it may be untenable for the federal government to shoulder the problem alone. It is also unlikely taxpayers would agree to shoulder the entire burden. Cedar Ed Lending and private lenders play a significant supplemental role, making private student loans and private student loan consolidations available,” said Harvey Berkey, Cedar Education Lending’s COO. “Furthermore, students must seriously consider their choice of college and major. They must consider whether their potential income will cover the cost of their loans.”