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In a follow-up to my last post about the loan rate on subsidized Stafford student loans about to double, guest blogger and frequent contributor to Bankrate, Christina Couch, explains to us how while the rate cap is good, it might not be as helpful as we think.
Good news for students -- as of Thursday, the House and the Senate are thiissss close to signing a provision that will prevent the interest rates on new subsidized Stafford loans from doubling from the current 3.4 percent rate to 6.8 percent July 1. The current version of the plan would lock in the low interest rate for the life of all subsidized Stafford loans taken out for the 2012-2013 school year. According to White House estimates, the move will save nearly 7.5 million students an average of $1,000 in extra student debt over the life of the loan.
While many students might think this means a sweet $1,000 rebate check will arrive in the mail, the benefits of the program will actually be much smaller in the short term. Mark Kantrowitz, publisher of the financial aid sites Finaid.org and Fastweb.com, estimates that with this cap, most undergrads will only save about $6 to $7 on their monthly student loan payments. "The rate freeze affects only new loans; and the rate is fixed at 3.4 percent for the entire life of the loan," he says.
The move to reduce student debt is undoubtedly a step in the right direction, but its efficacy is questionable in light of other financial aid changes that will go into effect this July, including stricter requirements on Pell Grant eligibility (that impact the lowest-income families) and the elimination of subsidized Stafford loans for graduate students. With several public college systems facing 10 percent to 15 percent tuition hikes in the next year, an $84 yearly loan savings looks like a fiscal fart in the wind.
Critics (including myself) argue that the billions Congress will spend to enact the bill would perhaps better be spent on expanding programs such as the Pell Grant -- that prevent students from taking on debt at all. If that's not a possibility, a reduction in loan debt for low- and middle-income families is better than nothing.
What do you think about extending the rate lock on subsidized Stafford student loans? Do you think the money could be better spent elsewhere?
How about stricter lending practices by the DOE? Giving away tens of thousands of dollars to people with no job, terrible credit, and no idea what they're going to school for creates artificial demand because of the easy money, thus rising the cost of product, eduction, and depleting government coffers. Higher Education is something to be earned, it is not an entitlement.