Our nation faces a long-term recovery dilemma: education. Students face an uphill battle with the average debt doubling in less than a decade, from $10,649 in 2003 to $20,326 in 2012. With federal and private loans, students are forced to make a decision that may devastate their financial stability for the next 25 years.
So the question is, which loans, federal or private, place the least stress on our soon-to-be workforce?
Government loans are more popular as they offer more protections and exit strategies for loaners. While Uncle Sam keeps interest fixed around 4%, banks remain a profit-driven industry, and thus have higher "floating" rates that which can accumulate to nearly 13%. Government also provides the option to subsidize a loan and pay the interest that accrues over time. For top universities with notorious bills of up to $55,000 a year, scratching interest is a huge relief.
Bank loans, much like unsubsidized government loans, gather interest from the moment they are issued. In a frightening reality, bank interest rates yo-yo unpredictably, so it's impossible to calculate how deep in the debt hole you’ll be come graduation day.
To avoid heart-attack-inducing scares, however, the government has established borrower protections. Say a student faces economic hardship by loosing their job, is ill, joins the military or Peace Corps. Federal loans can be deferred for up to three years. In contrast, banks may not provide deferral even with an appeal, regardless of the reason. If they do, they may add fees on top of interest.
Ultimately, when it comes time to pay back your debt, government loans are flexible, even providing "pay-as-you-earn" plans. Private loans however, are likely to add penalties if you don't earn enough to pay back the loan, resulting in a vicious cycle of all-consuming interest and debt that remains even if a student declares bankruptcy.
All things considered, loans have become necessary in education for the majority of students, with over $100 billion in federal loans and $10 billion in private loans each year.
Yet hope is not lost for our students. Senator Elizabeth Warren (D-Mass.) announced her Bank On Student Loan Fairness Act, recognizing that high student debt results in fewer opportunities for education, employment, and financial stimulus — leading to crippling economic growth. As student loan rates are set to double on July 1 — from 3.4% to 6.8% — Warren's demands that rates drop to the same 0.75% discounted to big banks when they receive government loans. "It is just wrong," stated Warren. "It doesn’t reflect our values to profit off our students who are drowning in debt, while we are giving a great deal to the big banks. We should be investing in our young people … [as] the debt [students] carry poses a threat to economic recovery."
Assuming this drastic change in student interest rates is successful, we may see more competition between private and public student loan rates, resulting in less pressure on the well-being of our students' wallets and their futures.