How Low Interest Rates Could Push College Costs Even Higher


College costsThe rise in student loan debt is rapidly becoming one of the most troubling trends in the economy. When graduates emerge into a weak workforce deep in debt, they face huge pressure to find the highest-paying jobs they can find, yet they still often have to make huge sacrifices for years in order to dig their way out of the financial hole.

With so many young adults struggling with loans, a recent call to maintain the current low 3.4% interest rate on new Stafford loans for another year sounds like a no-brainer. But former Education Secretary William Bennett thinks that low rates will only lead colleges to become more expensive.

The scary side of low rates

Bennett's controversial position that the government should only subsidize student loan rates for poor households rather than the middle class raises a lot of debate. But buried underneath that provocative call was a more interesting observation: that low rates can actually boost tuition costs.

Bennett's view has some evidence on its side from another part of the economy: real estate.

During the early 2000s, low interest rates stoked red-hot demand for housing, making it possible for buyers of modest means to get favorable payment terms that made even expensive homes affordable -- at least for a while. With a focus on creating the smallest monthly payments possible, innovations like interest-only mortgages led to many homeowners getting in way over their heads.

Similarly, low interest rates make it possible for more students to afford college, giving universities every incentive to boost tuition in the face of that higher demand. As a result, even if monthly payments may end up lower, they're charged on a higher baseline balance -- which can end up costing students more in the long run.

Gallery: Private Colleges With the Lowest Student Graduating Debt

What's far from clear, though, is whether higher rates would really force colleges to rein in tuition costs.

Thus far, students have seemed more than willing to shoulder immense, unsustainable debt loads in order to get a college education. As outstanding student loans pass the $1 trillion mark, the question isn't whether student debt will reach a breaking point -- but rather when.

Motley Fool contributor Dan Caplinger is indebted to his parents for helping him avoid the student debt rat race. You can follow him on Twitter here.

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Join the ‘student loan debt’ advocates & champions in the fight towards changing American perceptions; there is a movement to reach and change societal norms and heuristics in regards of how people think of ‘student loan debt’ and the serious repercussions in aggregate when the next financial crisis hits. When the student loan bubble bursts, and it will; the devastation will be long reaching into all our financial institutions, and then society will finally understand the foreboding economic condition and the actors who were involved in allowing this student loan debt catastrophe to happen: the responsible persons for the Student Loan Debacle, is majority of Congress & the Senate. And how did "WE the PEOPLE" and our wishes become a special interest group that those in Washington can negate.

Robert Applebaum OR

Denise Smith OR who is feverishly working for those older students who are over 50 & also those who are under 50 that are saddled with student loan debt.

Occupy Colleges - Natalie Abrams

Fighting for Bankruptcy Protections

Loan Reform Now:
“The mission of Loan Reform Now is to encourage the passage of laws that protect students from the negative impacts of the private student loan industry and their misleading practices.”

"Reporter looking to do a piece on parents who owe a lot for their children's student loans." Please E-mail

And the thousands of individuals who are rising up and saying to Congress and the Senate “enough is enough, get out of the pockets of special interest groups; quit catering hand and foot to the PACS,” and do the job you were elected to do by the American people, in assisting the American people and not big corporations, you know the United States citizens, the ones who are paying your salaries!

I can’t emphasize enough, walking away from student loans is really not an option. Because, your student loans never go away! EVER! There are many ways in which your debt can be dealt with the utilization of various programs. There is a link on the right, Navigating Through Your Student Loan Nightmare, which may help. More info on restructuring your debt will come later.

Congress and the Senate should be held accountable because of the lack of financial protections they eradicated; or should I say, [the bankruptcy protections] they have done away with, for the sake of their special interest associations.

Become Engaged - become a person who participates in their own life and assists in a greater cause for the good of the whole, and not just for the sum of its parts.

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May 15 2012 at 10:33 AM Report abuse rate up rate down Reply

This country really needs to get a handle on rising college costs. There is no other reason than "greed" that is driving the costs of a college education higher. Why should college costs be going up 10 times the rate of everything else in this country? This is especially onerous when many graduates can't find jobs or sign up and pay exhorbitant tuition for useless majors. When over a trillion dollars in student loans comes due and can't be paid, once again it will be the tax paying middle class that will be holding the bag and have to bail out the debt ridden students and a government run by financially inept imbeciles.

May 15 2012 at 9:45 AM Report abuse rate up rate down Reply

Why do they need more money (the Schools, Professors) what bulls..t, STOP RIPPING OFF THE MIDDLE MAN
every chance they can...

May 15 2012 at 9:31 AM Report abuse rate up rate down Reply