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Student Loan Interest Rates: Likely to Go Up With New Market-Based System

The House has approved legislation on student loan interest rates to switch to a more market-based system. With a threat of veto from President Obama and a looming July 1 deadline before the rates double from 3.4% to 6.8%, the interest rate debate is sure to heat up these coming weeks.

But now, I must ask: does the rest of the world have the same problem?

In a report published by the Consumer Financial Protection Bureau earlier this month, it found, “Between 2007 and 2010, the average student loan balance for households with student debt climbed by nearly 15%.” This is why policymakers such as Sen. Elizabeth Warren (D-MA), Rep. John Kline (R-Minn.), Sen. Majority Leader Harry Reid (D-Nev.) as well as others are pushing forward their own proposals to fix this problem.

We all know that student debt has been a growing problem in the U.S., but you would think that the U.S. would have at least the academic credentials to show for our expensive efforts. Yet the U.S. is still lagging behind in educational performance compared to many other developed nations. The US came in at #17 for cognitive skills and educational attainment while Finland, Japan, the U.K., Canada and Germany all ranked higher in the 2012 report developed by the Economic Intelligence Unit.

Let’s look at some of these high-ranking education systems:

#1 Finland: Finnish students do not pay tuition fees for higher education. Students are responsible for their own personal expenses and housing, of which the government offers financial aid for lower income families unable to pay for these necessities. Interest rate assistance is available to those who need it, however; as of February 2013, the average interest rate on student loans was 1.6% according to the Bank of Finland

#4 Japan: Education costs, including institutional and student living expenses, can be as low as $11,107 at public institutions and as high as $15,434 at private institutions in Japan. Under the Independent Administrative Institution, Japan Student Services Organization (JASSO), there are two types of student loans. One has a zero rate of interest while the other has a prime interest rate, which according to the Bank of Japan has not risen over 3% in the last thirteen years.

#6 United Kingdom: A 2010 higher education rankings report by the Higher Education Strategy Associates estimated $5,288 for education costs in England and Wales. On the other hand, the Telegraph reported earlier this year that most top U.K. universities are now charging 9,000 pounds or almost $14,000 for tuition. Starting from September 2012, the interest rate for existing income contingent repayment loans is set at 1.5%. 

#10 Canada: An undergraduate tuition fee for all Canadian students is about $5,581 for the 2012-2013 academic year. Canada has a similar system to that of the U.S. in terms of interest rates. Canadian students pay no interest on their loans until they finish their studies when the rate jumps significantly. They pay a fixed interest rate plus 5% or a floating rate plus 2.5%. However, “one quarter of a billion dollars is spent annually by various provinces and the Canada Millennium Scholarship Foundation to reduce debt at the end of the period of studies.” One tenth of all debt incurred by Canadian students is forgiven this way, according to an Educational Policy Institute report.

#15 Germany: Germany has always been a country of free public higher education until recent economic constraints have led seven of the sixteen German states to introduce fees. Even still, the average fee is about $1,300 per year. Although the tuition is low, student loans are still given at a zero percent interest rate and “the value of the loan stays constant in nominal terms.” Germany also has a threefold program of debt remission, which is based on need, merit and completion. 

While there is not one perfect education system in this world, it seems that other countries are trying to create more supportive systems of realistic repayment options for students and their families. Even Nobel Prize winning economist Joseph Stiglitz warns that we could fail behind other industrialized nations.

The Center for American Progress laid out a comprehensive analysis of the proposed legislation on student loan interest rates. The investigation by David A. Bergeron and Tobin Van Ostern stresses the importance of a long-term plan that takes advantage of historically low interest rates, but also includes a cap to protect students from higher rates in the future. Hopefully, Congress can think of a solution like that before July 1 or it’s going to be a very depressing Independence Day for 38 million student loan borrowers.

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