One class of borrowers may never benefit from today’s near record low interest rates: students.
Interest rates on federal student loans are scheduled to rise to a minimum 6.8 percent on funds borrowed after June 30 from the now minimum 3.4 percent for undergraduates. Christian Science Monitor estimates the rate hikes could add more than $5,000 to students’ loan payments after graduation. This comes as the total volume of outstanding student loans in the U.S. is estimated to be above $1 trillion dollars and as higher education costs are rising faster than inflation.
Student borrowers are largely a forgotten part of the U.S. interest-rate story. Yet their tales provide an opportunity to localize a national economic story and to make financial news more accessible to a wider audience.
Two out of every three college graduates has student loans, according to the Project on Student Debt. The average graduate leaves school with a bachelor’s degree and about $25,000 in loans, said the project, part of the non-profit Institute for College Access & Success.
More than 10 percent of borrowers owe more than $50,000 by the time they walk the stage, according to the New York Federal Reserve.
The switch to variable interest rates gave the federal government an opportunity to profit from student loans when rates rose and to improve other student loan programs at no cost to taxpayers, said Mark Kantrowitz, one of the country’s leading experts on student loans. But the government never anticipated student loan interest rates would fall as far as they did – as low as 2.875 percent in mid-2005, he said.
At the time, student loan interest was tied to the interest rate on 3-month Treasury bills. Those rates are influenced heavily by the federal funds rate, which has since fallen to a record low of 0 to 0.25 percent.
“The switch to fixed rates was partly an attempt to close the barn door after the horse had already escaped,” Kantrowitz said.
He said the government settled on a rate of 6.8 percent because it was close to the historical average for federal student loans. Still, the rate at which the government breaks even on the current student loan program would be about 6 to 7 percent using the same accounting measures as the Congressional Budget Office, Kantrowitz said.
Students already are protesting higher rates. Hundreds of thousands of students have bombarded lawmakers with letters urging them to keep interest rates where they are.
For journalists, this conflict creates a prime opportunity to better help readers understand why financing an education might cost more than refinancing a mortgage. It also is an opportunity to question how much the government should profit – or spend – on education finance.