Is College Education About to Become More Expensive?

The Bureau of Labor Statistics reports that an average of 196,000 jobs are added every month, exceeding predicted job growth. However, there is still a sharp divide between those with college or postgraduate degress, and less-educated individuals. A September 2012 study by Hamilton Project found that the unemployment rate for people without a high school diploma was more than 11 percent, whereas the unemployment rate for individuals with a college degree was less than 4 percent. As a result of significant differences in employment opportunities between college graduates and high school graduates, the rate of return to attending college is more than 15 percent. Despite In addition to the economic importance of acquiring a college degree, tuition costs have increased significantly over the past two decades. Brookings reports that in 2010, one in five American households had outstanding student debt.

This concern is particularly relevant because interest rates on federal loans have increased for undergraduate and graduate students. Any future potential reduction in total federal aid, along with higher interest rates, may mean that college could become less affordable.

In 2013, former President Barack Obama teamed up with Congress to modify the way in which interest rates on student loans were set by the Fed. There was a move away Congress moved away from the previous system used to determine interest rates in advance, to one in which the interest rates on federal student loans were tied to the 10-year Treasury yields. By linking the borrowing costs of students to those of the government, policymakers were successful at creating an environment in which students were able to benefit from low-interest rates. As a result of these legislative changes, students have benefited from the historically low-interest rate environment over the past few years. However, the situation is expected to change this fall. The New York Times reports that the rate on new undergraduate loans will increase from 3.76 percent to 4.45 percent. The rate on new graduate student loans will increase from 5.31 percent to 6 percent. Additionally, the rate on PLUS loans (available to graduate students and parents) will rise from 6.31 percent to 7 percent. The change is expected to be in effect from July 1.

This increase is not expected to drastically change the monthly payment made by a student borrower. However, the extra interest could add up over time. Borrowers who already have student loans should not be concerned about the rate hike. However, a college freshman in the fall will not be able to borrow before July 1 and hence, would be stuck with higher interest rates until the termination of the loan agreement. Congress has set a ceiling that prevents the interest rates on education loans from skyrocketing, thereby protecting borrowers. This means that the interest rates on undergraduate loans are capped at 8.25 percent, and interest rates on graduate loans cannot exceed 9.5 percent.

Higher costs to borrow from the government could potentially benefit private lenders and banks since the new interest rates are not applicable to private loans. Private loans carry variable interest rates, that is, interest rates can change over the life of the loan. Such loans have the advantage of not being subject to the borrowing caps that apply to federal loans. However, they lack some borrower protections, such as the ability to defer payments if the borrower is unable to fulfill the loan obligation.

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