Will the Democrats cut student loan rates?
Now that they control the U.S. Congress, the Democrats are attempting to reduce the interest rates for subsidized federal Stafford loans and to increase Pell Grant awards. The interest rate for federal student loans opened in 2006-07 is 6.8%. The Democrats propose cutting the interest rate in half, to 3.4%, gradually over a period of about five years.
While the interest rate cut may be a boon to students in the short-term, the rate cut will cost U.S. taxpayers billions of dollars each year. Since no sane company would provide low interest loans to individuals with zero income, the federal government guaranties the loan against default AND guaranties the loan companies a market rate of return. The difference in interest charged to students and paid to loan companies is paid for by you.
In the long run, the rate cut will not help students (or taxpayers!). Low interest rates mean that students can borrow more for the same payment. Just as low mortgage rates drive up the sale prices of homes, easy access to student loans funds emboldens schools to hike tuition. During the past five years, we’ve witnessed some of the lowest interest rates in history, along with the largest tuition hikes in history.
