Interest rates on government sponsored student loans (Stanford loan) rose from 3.4% to 6.8% on July 1. I firmly believe this is a bad idea.
Primarily, this will make it more expensive for students to attend college. Some students will no longer be able to afford the payments on student loans. They may decide to delay college or to dropout of college. These choices would be short sighted because going to college effects their income and unemployment significantly. The unemployment rate for people with only a high school diploma and no college was in 2012 (according to the bureau of labor statistics) 8.3%, versus the 4.5% unemployment for a person with a bachelors degree. There is also a huge difference in weekly earnings. The former group had a medium weekly earning of $652, while the latter group has a medium weekly earnings of $1,066. Knowing this, it is obvious a rise in student loan rates will hurt tax revenue and the economy.
However, I do not agree completely with the approach congress is thinking about either. They want to link the student loan rate with treasuries, which can be volatile. With in the past year, it has gone as low as 1.39%, and gone as high as 2.74%. Also, treasury rates are near historic lows right now, where it is around 2.6%. From 2001- 2007, it would hit higher the five percent, and even at its lowest point in the time period was still around 1% higher than it is today. Such a volatile index and one that is expected to rise is not a good way to base important loans such as these ones. I think we should revert back to the 3.4% interest rates.
However, this does not address the rise in tuition cost. Right now, since students can get loans so easily, colleges can continue to raise their tuition, since the students can just pay it off later. A way to solve this would to put a cap on the maximum student loan a person can get. I think it should be the cost of tuition at the state school, in the state that the person looking for a loan lives in. Then, every year the maximum loan would rise at the rate of inflation. This would immediately force private schools to stop raising their tuition as rapidly as they have, since a person would not be able to get a government sponsored loan for the entire tuition. For the state schools, as long the schools raise their tuition at the rate of inflation, things will run smoothly. However, if a state school raises their tuition above the rate of inflation, a loan would not be able to be given for the full tuition cost. If the college continues to raise its tuition above the rate of inflation, eventually people will no longer be able to afford the college, and it will be forced to stop raising the tuition as much.
Therefore, keeping the student loan rates at 3.4% will help students who take out loans. Limiting the amount of the loan that can be taken out will make state schools a better choice because their lower cost will be covered. Private schools will have to justify their higher cost because they can no longer tell the students to take out loans to cover the entire cost of tuition. Furthermore, the private schools will be less likely to raise tuition because they know that increasing tuition makes them less competitive with cheaper schools. They will be less likely to spend money on nonessential items like opulent student centers and fancy gyms because they can no longer raise tuition to compensate for the extra expenses. Everybody wins!