Friday, July 26, 2013

The Real Deal on the New Student Loan Interest Rates


Financial institutions that have private student loan workout programs are requested to provide student loan borrowers with information that clearly explains the programs, including eligibility criteria and the process for requesting a loan modification. This week the federal bank regulatory agencies issued a statement encouraging financial institutions to work with private student loan borrowers experiencing financial difficulties. This is a good start but stricter penalties should be implemented.  Financial institutions should be fined if they refuse to assist private loan borrowers with an affordable repayment plan.

Congress finally approved a plan to address the interest rate for federal student loans. New student loan interest rates will be set according to the 10-year Treasury yield plus a few percentage points. Under the plan, undergraduates taking out federal loans in 2013 would pay about 3.86%, graduate students would pay 5.4% and parent PLUS loans would pay 6.4 %. This only provides relief for this year.  If the Treasury yield increases so do student loan interest rates which will affect 11 million borrowers.

Under Congressional Budget Office projections, the interest rate is expected to increase over the next couple years, forcing student loan interest rates near 7% by 2017. Undergraduate loans are capped at 8.25% instead of 3.4%, graduate loans are capped at 9.5% instead of 6.8%, and PLUS loans at 10.5% instead of 7.9%. This would not be needed if the cost of college tuition was regulated. 

“We are opposed to the current deal,” Minnesota State Colleges Student Association president Kelly Charpentier-Berg said. “In the long-term, it’s actually going to cost students more. With it being market-based, when the economy goes up, the interest rate goes up.”

Unfortunately the Pell Grant does not provide enough money to cover one semester of tuition and forces students to obtain student loans. Tuition has become so expensive some students cancel their plans to go to college. Some experts believe that college tuition has become so expensive due to several factors such as:  declines in state or federal funding, increasing health care costs, soaring costs for labor productivity, colleges don’t and are not required to compete on tuition prices - Ivy league and other well-known colleges compete on academic reputation, hundreds of new rules, regulations and requirements that require colleges to change their business practices; other requirements that require colleges to hire additional administrators and compliance officers to ensure that they are not in violation of various new rules.

However, college tuition has also increased due to  food choices  including well-known fast food restaurants such as McDonalds, Starbucks, Pizza Hut, etc., more variety of bachelor degrees, new construction – at least 50% of construction cranes in America are on college campuses, elaborate student centers with theaters and bowling alleys, state of-the-art recreation facilities with rock-climbing walls; cable TV and wireless Internet access, online access to washing machines and dryers, and high college executive salaries, bonuses and exit payments.

Some experts state that the more aid colleges give the more they increase tuition. Colleges charge as much as someone is willing to pay.  Colleges that don’t accept federal loans have tuition that is half that of similarly-ranked colleges. The Minerva Project, a for-profit university in California stated that it will refuse Federal aid in order to keep tuition costs low. Cooper Union keeps tuition costs down because they don’t have a gym, swimming pools, climbing walls or a major cafeteria. Dormitories only house freshmen.

Students have been bamboozled to think that if a college charges a high tuition it must be a good school; this is not always the case.  If you have student loans take advantage of student loan forgiveness programs and demand affordable student loan reform from Congress and tuition reform from colleges.

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