Why are student loan rates so high?
Some people scoffed at Sen. Elizabeth Warren's proposal to cut them, but it's worth debating why grads aren't benefiting the way homebuyers are.
Some people rolled their eyes last week when Sen. Elizabeth Warren, D-Mass., proposed giving students a big break. She says college students who take on loans should pay the same ultralow interest rate the Federal Reserve charges banks.
Right now, college graduates pay 3.4% on federally subsidized Stafford loans, but that amount is set to double this summer. (And those rates were set by Congress more than a decade ago, when rates were higher than today's.) For parents taking out private loans, the rate is even worse, at 7.9%, according to BloombergBusinessweek.
Meanwhile, the Federal Reserve discount rate is just 0.75%.
The Fed's low rate has helped many Americans weather the recession. The accessibility of cheap debt has boosted home and auto buying as consumers have sought to lock in low refinancing rates or purchase a new home or a new Ford (F), for instance.
So why aren't college students benefiting from the same trends? While some people may scoff at Warren's proposal, it's worth debating.
Student loan debt is seen as a growing crisis. The thinking is that today's graduates won't be able to buy their first homes -- even at rock-bottom mortgage rates -- because they're too hamstrung by paying off their college debts at relatively high interest rates.
Average student debt for the class of 2011 rose by 5.3% to $26,600, according to the Project on Student Debt. Total student loan debt exceeds $1 trillion.
"There's this anxiety: What if I decided I wanted to get married or have children?" Shane Gill, 33, told The New York Times. He doesn't own a home or a car, and he isn't married. He also owes about $45,000 in federal student loans.
"I don’t know how I would. And that adds to the sense of precariousness. There's a persistent, buzzing kind of toothache around it," Gill said.
While the median age for a first home purchase is about 30, student loan debt may be causing some people to delay homeownership. The Federal Reserve Bank of New York said last month that homeownership among 30-year-olds with a history of student debt fell by more than 10 percentage points during the recession.
Warren isn't likely to succeed in her plan to get student loan rates as low as she'd like. One reason rates are higher than those for mortgages and car loans is that bachelor's degrees aren't tied to physical assets. If a student defaults, for instance, her diploma isn't actually something a lender can repossess.
Despite that, it's worth asking whether students and their families should be socked with rates as high as they are.
Follow Aimee Picchi on Twitter at @aimeepicchi.
The true dirty little secret to higher education. The easier and more money available to "students" does not buy one more dime of education. Universities and Colleges raise their fees and tuition to suck every additional dollar. So you are never getting more education for your dollar -- only more debt to go along with your education
"Degrees aren't tied to physical assets."
Interest rates go up as risk goes up. Welcome to the real world college boy. Buy a cheaper house and a cheaper car like the rest of us.
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