Naomi Lazny 17 April 2012 LA101H College Graduates: Never to be Debt Free?

The federal student loan program seemed like a great idea back in 1965: students could borrow money to go to could now and pay it back later, when they got a job. However, many of todays student loan borrowers are close to flunking out of school or defaulting on loans even if they graduated. United States student loan debt is now surging above $1 trillion, surpassing credit card and auto-loan debt (Schumer). The average student loan debt recently topped $25,000, a number that is 25 percent higher than that of a decade ago, and over 27 percent of loan borrowers are in default (Schumer). With a still unstable job market, these loans are increasingly hard to pay off. Not only that, but unable to find work, many students have returned to school, further driving up their lofty indebtedness. Student debt is a pressing issue that is affecting both current students and graduates alike, and the turmoil surrounding the present state of the United States economy is indefinitely inhibiting loan borrowers from repaying their debt. Subsidized Stafford federal student loans are a resource to help students cope with the cost of attending college. Stafford loans are offered on the full faith and credit of the United States government, and therefore are offered at a lower rate than they would privately (Bowen). To receive these loans, students must demonstrate financial need, to which they are awarded loans accordingly. These loans are not expected to be paid back while the student is enrolled in school, or for a six-month grace period afterward. There is a fixed federal-subsidized interest rate attached to them, and the federal government pays the rest of the interest while the student is in college. The College Cost Reduction and Access Act of 2007 cut the fixed interest rates on

newly subsidized Stafford federal loans for undergraduate students to 3.4 percent over a fixed period of time; 6.0 percent in 2008-09, 5.6 percent in 2009-10, 4.5 percent in 2010-11, and finally 3.4 percent in 2011-12 (Schumer). However, the interest rates on any new subsidized Stafford loans will double to 6.8 percent as of July 1, 2012 if Congress does not take action. The rate would not affect already disbursed loans, only new loans awarded after July 1st (Dervarics). In other terms, students still in school after July 1, 2012 will pay a higher interest rate on new loans, adding to their already stacking debt. President Obama and other Democrats have urged legislators in Congress to extend the lower interest rate. In 2010, 3 out of every 10-student loan borrowers had overdue loan payments by 30 days or longer (Bowen). Considering the fact that more students are defaulting on loans today than any other time in history, raising the interest rate will definitely put more undue fines on borrowers. In fact, raising the subsidized interest rate to 6.8 percent will approximately add $5,000 to those who have borrowed the maximum amount of $23,000 (over the course of four years attending college) in the first 10 years of repayment, and $20,000 over the next 20 years (Bowen). While the College Cost and Reduction Act has slowly decreased interest rates over the last four years, its expiration will result in an immediate economic crisis: borrowers defaulting on loans will potentially increase by an estimated 12 percent, and will therefore put even more of a halt on the repayment of student loans (Dervarics). The Democratic minority on the House Education Committee and Workforce Committee released new figures showing that more than 7 million students will incur an additional $6.3 billion in repayment costs for the 2012-13 school year if student loan interest rates double on July 1st (Dervarics).

In response to mounting student debt, the United States government needs to refine the system of government issued loans as well as make repayment easier. In President Obamas fiscal year 2013 Proposal for the U.S. Department of Education, he proposed that Congress improves the affordability of postsecondary education through an extension of the lowered subsidized Stafford loan interest rate as well as implementing a new Pay as You Earn plan (House education and the workforce committee hearing). As early as January of next year, the Pay as You Earn plan will allow about 1.6 million students the ability to cap their monthly loan payments to 10 percent of their discretionary income, and the plan will also forgive the balance of their loans after 20 years of payment. This is in comparison to the current law, which requires that student loan borrowers make payments equal to 15 percent of their income, and forgives remaining debt after 25 years (House education and the workforce committee hearing). For many who struggle to manage their student debt, this proposed change could lower their monthly payments by hundreds of dollars, thus providing the estimated 1.6 million borrowers with more manageable loans (House . . . hearing). College graduates are entering the one of the toughest job markets in recent history, said U.S. Secretary of Education Arne Duncan on October 25, 2011, and we have a way to save them money by consolidating their debt and capping their loan payments. And we can do it at no cost of the taxpayer. It is not new news that the job market is difficult, despite the costly diplomas that graduates have to display. Nevertheless, President Obamas plan to aid students ridden with debt is the most feasible plan to combat the insurmountable interest that borrowers are accruing, as well as the issue of defaulting on loans. As we are now at the pinnacle of the student debt crisis, there is proof that the lowered interest rate of the subsidized Stafford loan has impacted the indebtedness of loan borrowers in the United States. The 3.4 percent rate of

the Stafford loans approximately saved 1.6 million students $1.4 million this year (Braley). An extension of this low rate combined with the modified payment system called Pay as You Earn, will give students an opportunity to take control of their debt and manage it better. This will occur at no expense of taxpayers (which has been a major concern at the forefront of the debt crisis in the past). President Obama was quoted this past October saying In a global economy, putting a college education within reach for every American has never been more important. Thats why were taking steps to help 1.6 million Americans lower their monthly student loan payments. Steps like these wont take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference. Reducing the interest rate on these federally funded loans will clearly not solve the overall debt crisis. In fact, today it costs the federal government $7 billion in expenditures to retain the subsidized loan interest rate at its lowered form (Senate appropriations subcommittee on financial services). However, the price reduction for the loan borrowers will decrease the number of borrowers in default by 20 percent, which in turn will boost the repayment (Senate appropriations subcommittee on financial services). Furthermore, an increase in affordability of college costs has the potential to increase the access and completion of college for more Americans. Lower interest rates on loans have the ability to compete with the inflation of tuition costs. More citizens attending college and then having the means to repay the costs of their education is socially beneficial for the people of our country and economically worthwhile for the federal government. There are many contributing factors that have increased the cost of a college education and simultaneously raised the amount of indebtedness among students. The current state of the economy, the job market, and outrageous interest rates accruing on loans are a few of the major

situations influencing the student debt crisis. Regardless of all of the mounting issues surrounding the problem, the Obama Administration is taking action to provide relief to the millions of students and graduates that are struggling with debt. A plan is in motion to extend the low interest rate on government issued loans as well as rectify the current repayment procedure. If passed by Congress, it will have an immediate affect upon loan borrowers, saving them hundreds of dollars each month while making more payments than have previously been recorded (Braley). This policy is crucial to relieving borrowers from their struggles and boosting lowering the collective debt of the United States government.

Works Cited Bowen, H. (2012, Feb 25). Universities see more financial aid requests. McClatchy - Tribune Business News, pp. n/a. http://search.proquest.com/docview/923380378?accountid=13158 Braley urges house leadership to act now to keep student loan interest rates low. (2012). (). Lanham, United States, Lanham: http://search.proquest.com/docview/920280643?accountid=13158 Dervarics, C. (2012). Obama proposes multiple new college initiatives for 2012. Diverse Issues in Higher Education, 29(1), 6-6. http://search.proquest.com/docview/928540453?accountid=13158 House education and the workforce committee hearing. (2012). (). Lanham, United States, Lanham: http://search.proquest.com/docview/954634970?accountid=13158 Obama, Barack, and Office of the Press Secretary. "We Can't Wait: Obama Administration to Lower Student Loan Payments for Millions of Borrowers." The White House. 25 Oct. 2011. Web. 16 Apr. 2012. <http://www.whitehouse.gov/the-press-office/2011/10/25/we-cant-waitobama-administration-lower-student-loan-payments-millions-b>. Schumer: Student loan interest rates for thousands of students in southern tier set to double from 3.4% to 6.8% this summer unless congress intervenes - senator pushes legislation to block rate hike and keep college tuition affordable. (2012). (). Lanham, United States, Lanham: http://search.proquest.com/docview/1000437012?accountid=13158v Senate appropriations subcommittee on financial services and general government hearing. (2012). (). Lanham, United States, Lanham: http://search.proquest.com/docview/954634983?accountid=13158