An Unconventional Guide to Paying for College

The Case for Adjustable Student Loan Rates

student loans

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!

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10 Comments

  1. I hate the whole process of paying my student loans, but I am using my degree so there is some peace in that.
    Jules@Faithful With a Few recently posted..Finding Faith And Comfort In The Dark Spaces Of LifeMy Profile

    • @Jules – I would venture a guess that by actually using your degree, you are in a very small minority of college graduates currently doing that. Good for you!

  2. I think the GPA idea would be the most feasible. Major in need, or basing it on choice of major that’s subjective and harder to get buy-in one would think. But GPA could be a concrete number that’s universally applied.
    Tie the Money Knot recently posted..Increase in Breadwinner Moms: Is this Good or Bad?My Profile

    • @TTMK – Good point on the GPA. I suppose it would be very easy to get politics involved when talking about critical job needs, or job growth potential. Even if GPA were the only criteria, and there was an incentive plan for a higher GPA, I think it could still make a difference.

  3. Interesting concept. If I’m being totally honest, my initial reaction to the government subsidizing certain majors over others is that it’s just as un-capitalistic as a single interest rate. I actually like the concept of everyone getting the same opportunity and using it to do what they like. It opens the door for creativity that might be shut out if students are funneled down a certain path. I do understand what you’re getting at though and it’s a good point. Maybe like TTMK said, keeping it simple with rewards for GPA might be a way to go.
    Matt Becker recently posted..My Life Insurance MistakeMy Profile

    • @Matt – I see what you mean about limiting students by rewarding certain majors over others. It would be a tough sell to determine which majors qualified as critical needs or not. I still think that we need some way to encourage students to pursue a course of study that will actually land them a job however. Giving out student loans for students who are in majors with very low employment rates does not bode well for their ability to repay. I am all for being capitalistic and letting everyone find their own way, but I would rather them not do it on my tax dollar. Thanks for the honesty!
      MoneyforCollegePro recently posted..The Case for Adjustable Student Loan RatesMy Profile

  4. Interesting concept of typing rates to majors. But I think that would create a lot of overhead at the Department of Education where the lists of qualifying majors would need to be constantly updated. And what happens if you your school uses a slightly different name for the major, or if it is part of a larger department? For example, assume that geology was an in-demand field that would qualify for a rate deduction. That’s what I studied. Except that the school I attended was so small that there was no dedicated geology department; it was part of the physics department. So my diploma says physics even though I studied geology.
    Edward Antrobus recently posted..Net Worth Update: May 2013My Profile

    • @Edward – I think it definitely has the potential to create a new process with the Department of Ed, but if it worked, it would lower the amount of loans going into default, which could free up an incredible amount of money and resources to support proactive programs such as these. Lowering default rates could free up the Department of Ed to enact positive programs rather than spending their money on collectors and default prevention specialists. However, I think you have a very valid point, and your scenario is much more likely to actually happen!

  5. I think that providing a reduction for GPA is a good idea, but providing the reduction based on major is counter-productive. This will then just push people to different majors because they want to save money. It might have them rethink what they want to do in life and I think that defeats the purpose. The whole student loan process is out of control and I am happy that you are trying to come up with a solution. Who knows what would work, but a change does need to happen.
    Grayson @ Debt RoundUp recently posted..Do Borrowers Really Understand a Mortgage APR?My Profile

    • @Grayson – You are right, there is no cut and dry solution to the problem, but there is definitely a problem! You seem to agree with the consensus that the GPA reduction would be a good idea but that capitalism, or free will, should guide students to choose their majors rather than an interest rate incentive. Maybe all of us personal finance bloggers should get together for a student loan summit and figure out some ways to solve the student loan debt crisis. I think we could do a better job than what has been done the past few years!

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