The Student Loan Rate Debate

Have you heard all of the buzz about the student loan rate? If you already have an existing loan, don't worry -- your rate won't be affected. But an estimated seven million undergraduates who take out new subsidized Stafford loans will face an interest rate of 6.8%, double the current 3.4%, starting on July 1, if Congress does not keep the rate as-is. And with outstanding student loans already topping a trillion dollars, this pending increase on new loans has become a national issue (that even brought President Obama to slow jam about it on "Late Night with Jimmy Fallon").

How much would extending the rate cap help ease the financial burden of young college graduates? Would it be worth the cost to the national budget? Two "Starting Out" columnists face off below with their opinions.

Keeping Rates Low: Good for Students, Good for the Economy

By Liisa Rajala, Researcher-Reporter, The Kiplinger Letters

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As a recent college grad, nothing has introduced me to the real world like paying my own bills, including the $450 a month I count out to pay off my student loans. Future college graduates whose loans are subsidized by Uncle Sam may face even larger bills than I do. The White House estimates that each of those students' total debts would increase over the standard ten-year repayment period by $1,000, on average, if Congress doesn’t keep the interest rate on new need-based student loans capped at 3.4% for another year. A one-year extension may not save you much, but every dollar counts, especially when you're just starting out.

Plus, helping out student loan holders will benefit the U.S. in the long run. How? It would help make income-to-debt ratios more manageable, preventing graduates from digging themselves deeper into debt. It would help more young Americans avoid defaulting on student loans and damaging their credit scores. And have you heard all of the stories about young adults putting off major life expenses, such as buying a house, getting married and having kids? Lightening our student debt loads would leave us more money to spend on those major milestones sooner, making us bigger consumers who could help pump up the deflated economy.

Lower need-based student-loan interest rates, and further federal financial assistance, would also help class mobility. With these lower rates, more people who are limited by financial circumstances would have a chance to improve their lives by attaining a college degree. That, in turn, would create a better workforce overall, bringing in people with more diverse backgrounds, strong motivation to succeed and fresh ideas.

Congress, and our society as a whole, must seriously address the growing costs of higher education and find workable ways to make college affordable for all Americans. Extending this rate cap now will be a good start.

Loan Rate Debate Misses the Bigger Point

By Neema P. Roshania, Researcher-Reporter, The Kiplinger Letters

Sure, by preventing the rate on new need-based Stafford loans from doubling, lawmakers will help some of next year’s students save a few bucks. At the lower rate, an incoming freshman borrowing the lifetime maximum of $23,000, for example, would pay about $38 a month less over a ten-year repayment period on the subsidized undergraduate loans. But such a move would also cost taxpayers $6 billion. And despite that high cost, the big to-do over whether Congress should extend the rate cap for another year doesn't help solve the broader problem with student debts.

Absent from the debate is a focus on making sure that future graduating classes are better-equipped earlier on to face the financial realities of going to college. Students, and their parents, need to take more personal responsibility when choosing a college and deciding how to pay for it. You can help yourselves by using the net price calculators, which colleges are now required to offer on their Web sites, to find your personalized estimate of costs and aid eligibility. And try the calculators at FinAid.org to figure out how much you'll be paying each month once you're done with school and how much you'll need to make in order to reasonably cover the bill.

Also, you should know that there are many different paths to a college degree. You don’t have to attend a private university and rack up huge debts to score a well-paying job. The average cost of a four-year private college education is nearly $80,000 more than that of a public college.

Starting out at a community college could cut the cost of your degree even more. For example, in New Jersey, the Student Tuition Assistance Reward Scholarship (STARS) program offers high school students who finish in the top 15% of their graduating class free tuition at any of the state’s community colleges for up to five semesters. They can then transfer to a state school with a certain percentage of their tuition covered, based on their GPA. In Massachusetts, through the Tuition Advantage Program (TAP), students who finish an associate’s degree at a participating community college with a 3.0 GPA or higher receive a 33% discount on tuition at a state school for four semesters.

Extending the low rate on Stafford loans will give some students a break. But providing sound guidance on making smart financial decisions about higher education will help save money for all students -- and taxpayers.

Follow Liisa, Neema and the whole Starting Out Kiplinger team on Twitter.