The Case for Adjustable Student Loan Rates
Maybe that title is a little misleading…
I struggled with what to title this post because I could not figure out what would get my point across the best. What I am suggesting is a way to mediate the student loan debt crisis going forward by offering different student loan interest rates for different students.
On Federal Stafford Loan disbursed through June 30, 2013, the interest rate for subsidized loans is 3.4% and on unsubsidized loans is 6.8%. Unfortunately, if an extension bill is not passed, these low rates are set to expire at the end of this month. Both of the rates are set to effectively double.
Millions of students receive Stafford Loans every year, and every single one of them pays the exact same interest rate regardless of their situation. No other loan that I know of charges a set interest rate to every borrower. It is very un-capitalistic.
A Discriminating Student Loan Interest Rate
When you apply for a home mortgage you understand that the bank will take into account your personal situation before they come back with a loan offer. They will look at your credit score, your income, your payment history, the term of the loan, the home you intend to buy, your down payment, and the loan to value on your home. All of these factors play a role in determining how risky of a borrower you are, and therefore the interest rate and amount of money they will lend to you.
Student loans should operate on the same principle.
Student loan interest rates should take into account the student’s major, proposed course of study, career and education plans, grades, student loan repayment history (if applicable) and the outlook on job’s in that major.
The easiest way to do this would be to set a standard rate, and then give rate deductions for having qualifying criteria in each of these categories.
For example, let’s set the Subsidized Stafford Loan rate at 5% and the Unsubsidized Stafford at 8%. If you maintain at least a 3.0 GPA then you automatically receive a .25% reduction. If your major is in a critical need area, then you can receive another .25% reduction. The private job market on the lookout for employees with your skills, get a .50% reduction. Majoring in a critical research area, another .25% reduction.
This information could all be captured when submitting the FAFSA, and the interest rate would be returned through the FAFSA application. This would not increase the work on a school’s financial aid office, and would be a relatively simple process for student borrowers.
It would also give student borrowers an incentive to keep good grades, to major in a critical needs area, or to pursue a career field that was actually in demand, guaranteeing a job, and therefore the ability to repay those student loans.
Private Loans Could Also Join The Party
Private loan lenders would be even easier to incorporate into this flexible student loan interest rate model. Their loans are already based on credit and income so they have underwriting criteria in place already. They could also work on the interest rate reduction model, giving incentives when certain criteria are met.
This would likely increase the amount of quality student loan borrowers in their ranks, and increase their chances of receiving all of their money back.
The Bottom Line
There is not a quick fix for the student loan debt crisis. However, so many students receive loans to fund an education that does not benefit them. Students in courses of study that are not employable, and student who receive loans with a failing GPA are simply milking the system. They will graduate with student loan debt and no hopes of repaying those loans.
This system could at least show the importance of being selective in the major you choose, and highlight the importance of a course of study which will teach you the skills needed to get a job!