Student Loan Interest Rates Expected To Rise Again!

At the eleventh hour this June, Congress agreed on a deal to freeze interest rates for federally subsidized student loans. The deal kept student loan interest rates at 3.4 percent until June 30, 2013. Were it not for that action, Stafford Loan interest rates would have doubled to 6.8 percent on July 1, 2012. The interest rate freeze costs $6 billion, paid for mainly by decreased taxed deductions for company pension obligations. Even still, student loan debt is out of control and is damaging many graduates lives.

An interest rate increase would have had drastic implications for the hundreds of thousands of students relying on federal loans to finance their education. The national average for student loan debt is $25,000 and doubling the interest rate would have raised interest payments from $10,000 to $23,000 during the next decade. Faced with a bleak employment future, many college graduates could not bear this burden and would go into student loan default.

Earlier this year, student debt surpassed $1 trillion and though the interest rate freeze is welcome, it is only temporary. Also, it only applies to a small subset of student loans available to a portion of students and those who have already borrowed money are unaffected. As the economy improves, interest rates for student loans are expected to increase. Critics are calling for legislators to begin working on stronger reforms.

Student loan default is a major consequence of high interest rates. The Department of Education revealed that default rates increased from 11.8 to 13.8 percent for students beginning repayment during fiscal year 2008 as opposed to 2007. At for-profit universities and colleges, default rates jumped drastically during 2010, with 15 percent of borrowers defaulting within the first two years of loan repayment, an increase from an 11.6 percent figure in 2009.

The latest overall default rates are the highest since 1997. but two-year default statistics may not reveal the full extent of the student loan problem. According to an Institute for Higher Education Policy study, for each defaulting borrower, there are two more borrowers falling behind with payments. The research revealed that only 37 percent of those who began student loan repayment in 2005 could repay their loans on time and in full.

For many people with a student loan, bankruptcy becomes the only way solution during this restricted job market. However, this is an extreme measure and can be avoided if loan holders take a proactive approach. Student loan consolidation is just one measure that students can use to keep themselves out of bankruptcy.