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Right now, the interest rate on federal subsidized student loans is 3.4%, but if lawmakers don’t vote to extend the cap, it’ll jump to 6.8% after this year.
That this will increase the burden on college graduates paying off loan debt is a no-brainer, but one expert says it might help them in the long-run.
“Maybe the increase will cause students and their families to re-examine how much debt they are taking on,” says Joseph Orsolini of College Aid Planners. “Too many students are taking on too much debt.”
He’s got a point.
In a semi-annual report released today, the Consumer Financial Protection Bureau estimates students are holding a staggering $865 billion in loan debt. That total has increased by 57 per cent in the last decade, primarily due to college tuition and fee hikes.
The vast majority (90 per cent) of that debt comes from federal loans, which means raising the interest cap would leave few students unscathed.
“The trend since the government took over the student loan industry in 2010 has been to increase student borrowing costs. So I don’t hold much hope for avoiding an increase,” Orsolini says.
As he points out, lawmakers have already gotten rid of the old .5% rebate students received for paying loans on-time; eliminated subsidized graduate loans; and taken away the six-month loan interest deferral for new graduates.
Even so, Mark Kantrowitz of FinAid.org said the changes shouldn’t deter students from applying for federal loans–especially if they’re flirting around with private lenders.
“Federal loans are still going to be less expense (than private loans),” he told Your Money last year. “Always borrow from federal loans first. They’re cheaper in the long run and they have more flexible repayment terms.”
While federal loans have a fixed interest rates, private lenders tend to offer low introductory rates and then jack up the interest over the lifetime of the loan. That’s part of the fine print many students miss, which can lead to massive piles of debt after they’ve graduated.
Says Orsolini: “Heavy student loan indebtedness changes your path in life. It affects career choices, delays getting married and having children, and worst of all, forces graduates back into their parents home.”
See just how bad it can get. Read 9 horror stories from students rocked by private loan debt >