Americans hear it all the time: Education debt is good debt. But not when the debt is so overwhelming that it cannot be repaid.
On July 1, interest rates on new subsidized Stafford student loans will double, from 3.4 percent to 6.8 percent, if Congress and President Barack Obama don't intervene. Today the graduate of a Pennsylvania college faces average debt of about $30,000, without the cost of interest factored in. If that debt is paid back over 10 years at 6.8 percent interest, the graduate will have to shell out more than $40,000.
So what are government officials doing to prevent this?
The Republican-controlled House has passed a bill sponsored by Rep. John Kline, R-Minn., which would tie Stafford loan interest rates to the financial market and let them fluctuate each year, to a maximum of 8.5 percent. Education Trust, a Washington, D.C.-based student advocacy group, says the plan would endanger students financially because the moving rates will make it difficult to project how much they will owe upon graduation.
President Obama offers a similar solution: Tie interest rates to the market, but lock in a fixed rate for the borrower rather than let it change each year. It's projected that both the Obama and Kline proposals would save the government more than $3 billion a year.
Sen. Kirsten Gillibrand, D-N.Y., has a better idea. She would allow the 37 million graduates who are already carrying debt to refinance all college loan types at 4 percent and limit the total annual payment to 5 percent of their income. For students still in college, who face a doubling of their interest rates next month, she supports a Democratic plan that would freeze rates at 3.4 percent for two years and allow Congress more time to work on a comprehensive solution.
The Center for American Progress, a left-leaning think tank,estimates that her proposal for graduates already paying back loans would increase their disposable income by $14.5 billion because of the 5 percent cap, enabling them to spend more on houses, cars and other goods, thereby bolstering the economy.
The downside to the Senate Democrats' plan is the two-year freeze on the rate for current students kicks the can down the road, which is never satisfying. But at least it would treat today's students fairly and be an incentive for them to complete their educations, which is in the nation's best interest.