Student loan scam: why are today's poor subsidizing tomorrow's rich?

Authorde Rugy, Veronique
PositionColumns - Column

THE INTEREST RATE for the main federal student loan program was set to double on July 1, from 3.4 percent to 6.8 percent. Even in this contentious election year, there was one thing everyone in Washington could agree on: The rate hike should be avoided at all costs. The only disagreement was where to extract the $6 billion annually that would be needed to make up the difference.

But extending the lower rate, which was instituted by the College Cost Reduction and Access Act of 2007, is foolhardy. By keeping student loan rates artificially low, the federal government is contributing to the rapid increase in college tuition and forcing today's workers to subsidize the educational choices of tomorrow's big earners.

According to the latest data available from the U.S. Department of Education's National Center for Education Statistics, 39 percent of all undergraduates at four-year colleges had student loans in 2007-08. For full-time undergraduates the number was 53 percent. The overwhelming majority--93 percent--of these loans are subsidized by the federal government. And even the 6.8 percent rate that Democrats and Republicans were determined to avoid would still represent a significant subsidy; the rate on similar loans that students obtain in the private market is about 12 percent.

There are many other ways to help pay for a college education: You can work through college, choose to attend a cheaper state school, or take time off to earn money before or during school. So the decision to take on student debt is a personal choice, and the reward from getting a college degree is also personal. People making this choice have a responsibility to understand the costs and risks.

While aggregate student debt has reached $829 billion, which is higher than the country's collective credit card debt, the burden faced by individual students coming out of college is relatively small. According to the Department of Education, the typical college graduate who borrows money for attendance ends up owing about $22,000. The standard repayment period is 10 years, but terms can be renegotiated if needed, especially by people who choose to go into public service or teaching. According to the repayment calculator at Mapping Your Future, an online resource sponsored by student loan guaranty agencies, it would cost $253 a month over 10 years to repay $22,000 in principal at a rate of 6.8 percent.

Everyone wants to borrow money at the lowest rate possible. But it is...

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