Lower College Loan Interest Rates Won't Fix the Student Debt Crisis

Student loan debtOutstanding student loans having topped the $1 trillion mark, but it's down at the individual level where that debt burden has built up that former students are finding it difficult to bear. With jobs still hard to come by, young adults are looking for any break they can get.

Those with student loans finally got some good news over the weekend, as Congress extended a cut in the interest rate on federal Stafford loans and prevented the rate from returning to 6.8% from its current level of 3.4%. According to The Washington Post, the one-year extension of the lower rate should translate to savings of about $1,000 on a typical loan over its lifetime.

A Short-Sighted Quick Fix?

Undoubtedly, saving $1,000 or more on student loan interest would be a help to many struggling graduates. In fact, critics of the measure point out that it only extends low rates for a single year, which some argue raises uncertainty about borrowers' financial future -- even though the original rate reduction was intended from the start to be temporary. Extending the interest reduction permanently would obviously provide much more than $1,000 in savings for many students.

Those savings, however, obscure the real source of the problem. And unfortunately, lower loan rates do nothing to address that cause.

Too often, when people buy things on credit, they focus only on their monthly payments rather than the actual total cost of what they're buying. Some experts believe that the lower monthly payments that result from low interest rates explain why college tuition has risen so far. Higher rates would change the supply-demand equation, making college less affordable and forcing schools to rein in tuition to keep their enrollment up.

Proponents of low student-loan rates argue that we should do everything we can to allow people to go to college. Yet similar government policies encouraging home ownership arguably led to the housing bubble, and when it burst, the net effect was to force many homeowners out of their homes.

The only way to solve the student debt crisis is for new college students to work hard to avoid that debt in the first place. By carefully weighing the relative advantages of a more expensive school compared to a less costly one, students can make smarter decisions about whether taking on more debt than absolutely necessary will really pay off in the long run. Until students start thinking that way about their education, though, they'll continue to struggle under mountains of debt after they graduate.

For more on smart borrowing moves: Fool contributor Dan Caplinger got out from under his student loans awhile ago. You can follow him on Twitter here.

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We need to lower the cost of college--it is not the interest that is killing us, it is the principal and if that is needed to keep pockets fat of the administrators and used for non education........a reduction rather than 25-40% increases would make a difference.

July 10 2012 at 9:13 AM Report abuse rate up rate down Reply

where is the outrage that a class of people are getting government subsidises? after all, many people were against the money going to the auto companies.

July 08 2012 at 9:14 PM Report abuse rate up rate down Reply

Bottom line: tuition skyrocketed out of control because colleges know they will be paid one way or another. There was no government oversight because politicians know colleges will just raise rates to cover any assistance they take away to balance state/federal budgets. Our parents generation lets them get away with this because they would rather students graduate with enormous debt than have the government balance the budget on something like Social Security.

July 07 2012 at 7:21 AM Report abuse rate up rate down Reply

The government should stop subsidizing student loans altogether. The tuitions are high because the government induced demand by offering tax-payer funded scholarships and tax breaks. I don't know about you, but subsidizing a mediocre student's philosophy degree doesn't really do much for me or any other tax-payer.

If education is as valuable as most of you think it is, then people will be willing to work and pay for it, with or without the help of Uncle Sam. When the government gets involved, it just creates moral hazards and inflated prices (housing???). The new American way of subsidizing with borrowing and spending has created the boom/bust cycles we've seen. If the government bond bubble doesn't pop first, taking the tuition bubble out with it, then the tuition bubble will pop all by itself.

If you're going to pay $200 grand for a piece of paper from a college, make sure you're developing a marketable skill set. Otherwise, develop a marketable skill set without college. Don't put a piece of paper on a pedestal because everyone else does.

July 06 2012 at 10:20 AM Report abuse rate up rate down Reply

That's fuzzy math logic. Students usually aren't even aware of the interest on their student loans until they have to start paying it. In fact the average student is desperate and takes these loans without ever looking at the interest rate because it is the only way they can stay in school. It should be the same as getting a home loan but with real oversight and real regulation. The education you are getting should be assessed to insure the money you are borrowing is worth the education/degree you are getting. After all, if the jobs students will get with those degrees when they graduate is the ONLY REAL collateral then shouldn't the cost of the education be justified based on the value and prospect of real living wages that will come from that education? I graduated with a hefty student loan debt only to find I couldn't afford to pay back the loans working in the field and positions that my degree affords me. Instead I had to go into a completely different field that didn't require the education I had spent years getting in order to pay back the loans and have enough money left over to live off of. What a waste of a 4 year education. My student loans are paid off but in order to make a living I can't afford to use my degree because the salaries in the fields I can work in with my degree are pitiful. Not to mention I would have had to default on my student loans in order to work in the field I got my degree in.

July 05 2012 at 6:28 PM Report abuse rate up rate down Reply

If our politicians and President had any guts at all they would make lowering college tuition and increasing availability of college education a huge priority. In a truly forward thinking nation, college education would be free to all who qualify and be attainable online or via correspondece courses. Colleges only exist in thier current form due to the revenue they generate, not to the quality ot number of graduates they produce.

July 05 2012 at 9:06 AM Report abuse -2 rate up rate down Reply

freeeekin GLORIFIED HIGH SCHOOLS charging these EXHORBITANT tuition rates to pay their glorified reeducation leaders also known as proFESSuhS-

July 04 2012 at 12:46 AM Report abuse +2 rate up rate down Reply
1 reply to Setanta's comment

Obama supporters, all.

July 04 2012 at 1:00 PM Report abuse +2 rate up rate down Reply

At least the rates are low but it is distressing that young people have so much debt.

Frankly, I have told friends' kids, to think about electricians, plumbing, flooring contractors, auto and motorcycle mechanics for better possibilties.

July 03 2012 at 6:51 PM Report abuse +3 rate up rate down Reply

First, the government does not value education the way the American citizen does (or should). The one thing a government is genuinely scared of is an educated citizen. A body of people who can think and speak for themselves, who actually understands where their tax money is going towards.

This is why education is ranking 17th in the world. Because Congress do not prioritize education.

Did you know there is a bill pending in legislation that would forgive teacher's student loans up to $25,000? It was introduced in January of 2012, and has not moved since. Sign the petition at electedface.com now!


July 03 2012 at 3:26 PM Report abuse +1 rate up rate down Reply
1 reply to electedface's comment

excuse me--you consider WHAT PASSES for an education today to be of value ?
OPEN ADMISSIONS DESTROYED what was left of it.

College today is the equivalent of what was taught in the 10th through 12 grade. Back then, a high school graduate knew grammar,syntax and agreement ,calculus ,physics etc and could read and write .

Our educational system was deliberately destroyed and today there aren't even enough higher math and science teachers available.

July 04 2012 at 12:51 AM Report abuse +1 rate up rate down Reply
1 reply to Setanta's comment

i agree with you, i graduated high school in 1973, back then they actually expected you to have a firm grasp of mathematics and science (they at least gave you an understanding of basic physics in the country school i went to) as well the english language and literature, todays kids cant solve an elementary math problem without a calculater, literature? forget it. their "literature" is "you tube"

July 04 2012 at 3:18 PM Report abuse +2 rate up rate down

it may not be cure but it wont hurt, ps to all the ignorant people that think the students should work and pay more in cash and borrow less have you seen unemployment rate for thoes under 23 the year most should graduate, also tuition increases have far exceded wage increases for said age group that is supposerd to pay more in cash than borrow. my son is paying ten times more at wright state than i did in 1970 and is not making double what i made per hour, so he works double the hours to borrow more to finish school. whats up with that all you they should work and borrow less either had rich parents or dont live in real world. highre education is becoming possible only for wealthy children which means more people comming from overseas to fill skilled employee positions and the wealthy just dont understand this simple fact or just dont care,a stong middle class builds a strong democracy a weakining middle class means revolution comming and my guess is wealthy really wont like that

July 03 2012 at 2:00 PM Report abuse rate up rate down Reply
1 reply to gladfly256's comment

you graduated from college? seriously? how did you do that with no knowledge of the english language?

July 04 2012 at 3:23 PM Report abuse +1 rate up rate down Reply