As June 30, 2012 approaches, Congress is working out the kinks and trying to extend Federal subsidies to keep Federal Stafford Loan interest rates from doubling.
In 2006, interest rates on these Federal loans were gradually cut back to the current rate of 3.4%. If an extension of this measure is not reached by June 30, 2012, rates will jump back up to 6.8%.
According to John Boehner, Congress is close to a one-year extension preventing a rate increase. This sounds great and should save student loan borrowers billions of dollars right?
The Dirty Secret
Well, it’s not really a secret, but it has not gotten much press. All of the recent news on this topic has dealt with preventing the coming rate increase and it seems very likely that this will happen.
Unfortunately, the benefit of the extended rate reduction is accompanied by two changes that will only increase the burden on student loan borrowers.
First, undergraduate students will no longer be entitled to the statutory 6 month grace period following graduation. This essentially means that payment is due the day after graduation.
College graduates relied on the 6 month grace period to find employment, earn income and save for the date student loan payments were due. Now, graduates will no longer be afforded that luxury and this change is expected to cost borrowers roughly $2 billion.
The second change deals with graduate loans. As you know, graduate degrees are almost a requirement now if you hope to land a high paying corporate job.
As of June 30, 2012, graduate students will also lose their 6 month grace period following graduation. In addition, graduate students will be responsible for paying the interest on their loans while attending school.
This change has done away with subsidized Federal loans for graduate students. In today’s economy, this could deter potential students from pursuing higher education post-university.
This change is expected to cost borrowers approximately $18 billion.
A Positive Outcome
At first glance, this new plans seems troubling. With an overall increased cost of close to $20 billion, it seems like student loan borrowers stand to lose big time.
On a personal level, maybe not. With the rising cost of education comes the rising student loan burden. This ascension of tuition and debt has gone unchecked for years.
Perhaps this increased burden on borrowers creates a built in check. A check that will cause potential students to truly evaluate the cost of their education and the financial burden they are placing on themselves.
Student loan borrowers will now be forced to step back and assess the value of their education, inform themselves and hopefully make smarter decisions. This could potentially lead to a natural correction in tuition costs and the student loan debt crisis.
I know I am reaching, but I am trying to find some positive associated with a $20 billion cost to consumers.
Image courtesy of srthnow.