NEW YORK-The potential doubling of the subsidized Stafford loan rate isn't the big story Washington and numerous media outlets are making it out to be, say a number of student lending experts, who suggest there are instead larger issues with student lending that need attention.
Republican senators recently blocked efforts to vote a Democratic-sponsored bill that would have retained the current 3.4% rate on subsidized Stafford loans over disagreement between the two parties on how to pay the $6-billion-per-year cost. Without congressional action the rate on the loans to almost 7 million people will double to 6.8% on July 1 because of a 2007 law that gradually lowered the rates.
Analysts who spoke with Credit Union Journal indicated that some of the news reports are misleading people to think there will be a big impact on student borrowers if the subsidized Stafford rate doubles. They say the rate hike would not be a significant hardship, since the interest for the subsidized Stafford is paid by the government while students are in school, and that the loans are never for large amounts. They also say a spike in the subsidized Safford rate won't impact how private student lenders set their rates.
Nearly all those interviewed insisted that media attention would be best directed toward the rising state of college tuition and how high schools fail to prepare enough students to make their best educational choices.
30 Cents A Day
"The average student loan balance coming out of college is $25,000, this (potential rate hike) might mean about 30 cents a day over the course of a loan repayment," said Kenneth O'Connor, director of student advocacy for Fynanz. "This may not affect the individual consumer as much as some people are talking about. Politicians are out talking about it, and this is something they can stump about. There is controversy here and it gives them something to spin."
Jim Holt, VP of sales operations for the private student lending CUSO Credit Union Student Choice in Washington, told Credit Union Journal that a jump in the subsidized Stafford rate, while never a good thing for borrowers with financial need, will have "little effect." Outside the fact the government pays the subsidized Stafford interest while students are in school, another reason the rate jump won't have a huge impact is because the loans are small. "(Dependent) freshman can only get $5,500 their first year between the subsidized Stafford and unsubsidized Stafford combined. When you look at the overall costs of private schools, that is really not that much."
Eric Bugger, VP of student lending at the $2.2-billion Wright-Patt FCU in Fairborn, Ohio, is not watching Washington to see how the standoff unfolds while making decisions around how his CU manages its student lending portfolio. "I don't expect what's going on in Washington will have a significant impact on private student loan rates. We're presently pricing our private student loans at Prime plus 2.5% with a floor rate of 6.0%."
Some credit unions, however, could see increased business if the subsidized Stafford loan doubles, surmised Bugger. "It could drive more students to take a look at other options, including private student loans. We partner with CU Student Choice to offer very flexible options when it comes to terms and repayment options. But we have said all along that students should look at all of their options before making decisions and make sure they explore scholarship and grant opportunities first and student loans or other avenues second."
The Real Issue
But the real issue, says Fynanz CEO Vince Passione, is to fix the educational system so high schools do a better job preparing students to go to a school they can afford and to choose the type of major that will give them a good return on their educational investment.
"The days are over when the young adult goes off to school and is undecided. That's OK, I guess, if the parents can easily afford to pay the schooling. But if not, very wise choices must be made."
Passione said those choices have to focus on the value the school delivers in relation to its costs, what the student and family can actually afford, and a major that will pay off in the end with a good return over the course of a professional career. "You can't pay $250,000 and more for a degree that ends up returning $40,000 a year when students graduate," Passione emphasized.
CU Student Choice's Holt places much of the blame not on students taking on too much debt, but instead on colleges he believes are doing little to control costs. He noted the cost of a four-year public institution over the past decade has risen 5.6 percentage points beyond the rate of inflation, and further observed that between 1982 and 2008 the median family income rose 147%, while college tuition and housing rose 439%. "Families cannot keep pace with this."
The news story that should be focused on now, and is not, said Holt, is the "bubble needs to burst in the cost of higher education. Our colleges and universities are one of the crown jewels of this country, and yet we are in jeopardy of pricing this education out of the reach of many Americans. Colleges and universities have to take accountability. The presidents of universities have to take ownership of this problem and make tough choices-just like all Americans have during this recession."
For info: www.studentchoice.org, www.fynanz.com
