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REPORT: The Cost of College Will Soar if Interest Rates Allowed to Double

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President Barack Obama speaks at the University of Boulder on the importance of keeping student loan interest rates low.

CREDIT: AP Photo / Carolyn Kaster

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More than 7 million students and their families rely on Subsidized Stafford Loans to help pay for college. The loans distributed by the U.S. Department of Education currently hold an interest rate of 3.4 percent. But that rate is set to double if Congress fails to act by July 1, 2012. If that occurs, millions of students will see their interest rates soar to 6.8 percent on the new loans they take in the next year thereby causing a steep rise in their loan burden and effectively increasing the cost of attaining a college degree. At a time when tuition is rising at 8.3 percent a year and median wages for young people are falling, young Americans and their families can ill afford more Washington inaction.

If Congress allows the interest rate to increase:

This increase comes at a time when American families are already struggling financially, and having a college degree is more important than ever before. Given the importance placed on a college education and the significance of higher education to a nation’s economic competitiveness, it is unsurprising that in a recent poll 92 percent of young Democrats and 78 percent of young Republicans say that increasing financial aid and making loans more affordable for college would help make the economy stronger.

The real impact on families

Doubling interest rates will cost the average student and their families approximately $1,000 more for each year in school. This increase comes at a time when tuition has been rising at 8 percent per year on average. Students are actually paying more than the cost of tuition when loan interest payments are factored into the equation. Those borrowers relying on Stafford Loans will see a 20 percent increase in the effective cost of college next year.

Millions of students and their families will be impacted by this change. There are 20.5 million college students in the United States and of those, an estimated 7.4 million students take out Subsidized Stafford Loans.9 In other words, one in three students will see their interest rates double.

This increase in the cost of college will hit students and their families at a time when young adults have struggled to find work and wages have stagnated. Median weekly earnings for 25- to 34-year-olds have fallen 5 percent since 2001. The result is that young adults are less able to pay their student loan debt even as the amount they owe balloons with rising tuition. This will make it harder for young adults to afford college at a time when having that college degree is more essential for employment than ever.

Young Americans support increasing financial aid and making college loans more affordable

Given the increasing importance of a college degree and the steep rise in the cost of college, it is unsurprising that the Millennial generation wants Congress to make our economy stronger by making college more affordable. In fact, in a poll conducted last year, 92 percent of young Democrats and 78 percent of young Republicans say that increasing financial aid and making loans more affordable for college would help make the economy stronger. Overall, 88 percent of young Americans stated that increasing financial aid and making loans more affordable for college would help make the economy stronger.

Conclusion

Young Americans and their families simply cannot afford to have Congress sit by and do nothing while the interest rates on Subsidized Stafford Loans are set to double in July. The great recession and stagnating wages have already made it more difficult for young Americans and their families to afford the cost of higher education. At the same time, obtaining a credential beyond high school has become more important than ever to achieving financial security for individuals as well as keeping America competitive in an ever-expanding global economy.

As the July 1 deadline nears, it is imperative that Congress acts to keep college affordable for 7.4 million college students and their families.

Download this brief (pdf)

Read this brief in your web browser (Scribd)

Jennifor Mishory is the Deputy Director of Young Invincibles. Rory O’Sullivan is the Policy and Research Director for Young Invincibles.

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