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Mixed news for college students

By Barbara Whelehan · Bankrate.com
Saturday, August 3, 2013
Posted: 6 am ET

This week college students caught a break when Congress passed compromise legislation that will link interest rates on federal student loans to a market-based rate. It's a fait accompli since President Barack Obama pushed for such a measure.

The federal Stafford loan rate for undergraduates this fall will be about 3.9 percent, roughly 2 percentage points higher than the 10-year Treasury note. The rate is capped at 8.25 percent. Graduate students and parents who take out Plus loans will pay slightly higher rates.

As the economy strengthens, the rates will increase. Next year, the Stafford loan rate is projected to be 4.62 percent for undergraduates, according to The Wall Street Journal. But that's better than the 6.8 percent rate that went into effect July 1 -- double the previous fixed rate that had expired.

Great news, right? Well, not if you're looking at the big picture.

"Solely focusing on student loan interest rates for current and future borrowers is the wrong policy debate," said Tamara Draut, vice president, policy and research at Demos, in a statement following its release this week of a new study that paints a broader, bleaker picture of the student loan problem.

Student loans a wealth inhibitor

Some 66 percent of college seniors today incur an average debt load of $26,600 in student loans. That's up from 41 percent in 1989. Starting life out with this much debt is like trying to drive in neutral -- it's hard to get ahead. To some extent retirement planning must take a back seat to servicing debt.

The Demos study affirms that student loans impede the ability of college grads to accumulate wealth over time, relative to their debtless colleagues. The liberal public policy organization puts the wealth shortfall at nearly $208,000 over a lifetime for a dual-income household with combined education debt of $53,200.

Roughly two-thirds of that figure -- or $134,000 -- reflects lower retirement savings than the household with no student debt. The reason: Early on, the indebted save less for retirement to service their student debt, and they lose out on compound interest. The $70,000 balance in the shortfall is due to less home equity than the household with no education debt.

The study makes loads of assumptions, based on data from the Federal Reserve's 2010 Survey of Consumer Finances and other sources such as the National Association of Realtors and the Employee Benefit Research Institute. But the picture is not entirely gloomy. The college grads from both households earn good money and place a premium on saving money. Despite the $207,890 discrepancy in savings between them, each household accumulates a net worth in excess of $1 million by retirement age.

The wealth disparity widens for households with significantly higher education debt loads -- those of students from low-income families and minority ethnic backgrounds, for example. Demos plans to do another study to calculate the opportunity costs for low-income and minority borrowers.

To solve the student loan problem, Demos advocates for change, including the reform of bankruptcy laws to allow for the discharge of education debt.

How do you think the problem should be solved?

***

Follow me on Twitter: BWhelehan.

Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book for Gen Y by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.

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1 Comment
Celest Horton
August 03, 2013 at 9:38 pm

I think as a society we need to focus more on teaching parents and students how to better prepare so that they can pay for college without loans. These student loans are like an epidemic and the rate of debt that the current graduates accumulate is out of sync with their income potential and they have such a hard time getting their life off the ground.

I have dedicated a website and podcast to helping parents and students learn what steps are necessary to secure funding without loans. I hope it helps out: howtopayforcollegehq.com

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