Is Student Loan Reform Possible?

As you may know, last week the interest rate on subsidized Stafford loans rose from 3.4% to 6.8%.  The question that remains is will this move hurt students or could it be the catalyst to break the student loan bubble?

This increase in interest will only affect student loans taken out after July 1, 2013.  In most cases student loans are not dischargeable with bankruptcy.  With no way out but to make payments, a large amount of student loans can seriously impede someone’s life if they are unable to pay them back.  These large amounts of student loan debt can damage credit, burden or decrease take home income and possibly delay or prevent one from making big financial commitments such as getting married or buying a home. 

The ultimate problem with taking a student loan is that when a student graduates with a medium to large amount of loans and ultimately cannot find a job with adequate pay, the ability to repay the loan is hindered. This means simply that they may not be able to make full (or any) payments on the loan.  As a result the amount owed can escalate and/or balloon and make it near impossible to pay back.  With no way out, the debtor has no choice but to make payments on the loan or let it go into default inducing possible legal action against them for failure to pay.

When taking out a traditional personal loan, you must have established credit.  Your credit history will help the lender determine if you are a risky borrower or not.  One of the main issues is that a student applying for a student loan usually does not have established credit, making it impossible for the industry to base the lending on merit as is done in traditional lending.  Therefore, everyone is given an opportunity to take out the loan, even if they may not be able to pay it back. Given this fact, the incidence of default and risk of default is higher especially when the economy changes causing jobs to be limited and pay to be stagnant.    

Another issue that arises in the student loan reform debate is the lack of education that surrounds the borrowing process.  Although more publicized now, many students in the past didn’t realize how much debt they were accumulating while in school. With no plan or realization on the expense to pay the loan back,   many student loan borrowers struggle with repayment. The result is that the borrower has to pay the loan for longer, accumulating more interest ultimately causing them to be at risk to default on the loan. 

The news on student debt as of late as well as the recent interest increase in subsidized federal loans may (and should in the writers opinion) encourage prospective college students to choose cheaper colleges (either state or two year), more practical majors and be more aware of the amount of loans they are taking out along with repayment figures.  The reality of the student debt issues may also encourage more students to find other ways to fund their college education. Although fear of student loan debt may discourage a student from attending a college all together, this is not necessarily a bad thing, since many students wind up going into fields (post graduation) that have little or nothing to do with their degree.  This may help weed out those less likely to graduate.   

Today Congress and other reformers look for a resolution for the student loan debt epidemic, the actual increase in these specific debts will only add about an extra $60 per year to the average student’s loan.  Given this fact, the focus may be better on a solution to the cost of education as a whole in this country rather than a small single type of loan.