Student Debt Q&A: Why Are Rates of Grad-Student Debt So High? – Real Time Economics

Surging enrollment in debt-forgiveness programs recently prompted the government to increase by $22 billion its estimate of the long-term costs of the provisions. 
PABLO MARTINEZ MONSIVAIS/ASSOCIATED PRESS

Why are the rates of grad-student debt so high? How do federal loan forgiveness programs work, and do they, as some critics argue, contribute to the rising rates of debt? Reporter Josh Mitchell answered questions in a recent Facebook Q&A. Here are some lightly edited highlights.

Q: Where can I go for more info on federal debt forgiveness?

A: StudentAid.ed.gov. Also, your loan servicer might be able to answer questions about what you qualify for.

Q: Do you agree with this statement: That the federal government is the problem. The federal government guarantees student loans, which allows colleges to charge an insane amount of money. To solve this problem we do not need more government, but we need to remove the government from secondary education that would be the panacea that the public so desperately needs.

A: There is a long ongoing debate about what role the government’s lending programs have played in the rapidly rising cost of higher ed. I wrote about that here. On the one hand, there’s an argument that the government has made credit so loose that it’s become too easy for students to overborrow while enriching their schools. On the other hand, without government lending, there’s a big concern that only those with the best credit would qualify for private loans and have access to higher education.

Q: Forgiveness programs mean interest rates go up.

A: Enrolling in income-driven payment plans doesn’t raise rates, but it does risk that one’s balance will grow. That’s because in many cases the new monthly payment won’t cover the interest. So it is something that borrowers should definitely consider.

Q:  Lots of student loans carry interest rates that seem pretty high to me—in the neighborhood of 6% to 7% . Are students defaulting at rates that justify this interest? 

A: Interest rates on federal student loans are set by Congress. Rates on graduate loans are currently 5.84% and 6.84%. Short answer: Grad students are charged higher rates than undergrads, even though they are more likely to repay and thus less of a credit risk. And that’s in large part to subsidize undergrads. In other words, the government is charging higher rates to grad students and using that revenue to push down rates for undergraduate students, and also to cover costs when undergrads default on their loans. The idea seems to be to give as many people access to college as possible–even if that means charging grad students higher costs–since that’s increasingly seen as the key to getting a decent-paying career.

Q: What if I just didn’t pay my student loan? My balance is $8,500.

A: That would be a very risky move that would lead to negative consequences, particularly since your balance is relatively small. First, your balance would grow and grow and grow. Then, assuming your debt is federal loans, the government would ultimately track you down and has the power to garnish your wages. This debt generally does not go away–it’s extremely hard to get it rinsed in bankruptcy. Not paying would very likely haunt you for years to come.

 

Related reading:

Grad-School Loan Binge Fans Debt Worries

Federal Aid’s Role in Driving Up Tuitions Gains Credence

 Why Job Growth May Not Be as Bad as You Think (If You Went to College)

 


 


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21 August 2015 | 12:09 pm – Source: blogs.wsj.com

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