An Interview with Clare McCann: The Stafford Debt Issue

Jul 1, 2013 by

college-debtMichael F. Shaughnessy

  1. Clare, it now seems to be official- the Stafford Student Loan Interest rates have “ doubled “ from 3.4 to 6.8. First of all, am I correct on these numbers?

That’s right, but only for a small subset of loans. Interest rates on all newly issued Subsidized Stafford loans doubled from 3.4 to 6.8 percent as of July 1. According to the White House, about 7.4 million students receive these loans, and it will mean about $1,000 more in payments over the life of each loan.

2) Now, I guess everyone at this juncture looks to someone to blame—Obamacare? The Parents? The Economy? The Debt? The Students for Not Working? Do you have a demon or is this just a natural consequence of someone in Washington not balancing the budget?

Congress knew this deadline was coming. Last year, they took the easy way out in an election year and passed a one-year extension of the lower rate, but real consideration of these issues never occurred in the interim year. This summer, Congress faced the same deadline, but without the same public pressure and given the partisan split between the Democratic Senate and the Republican House, they were unable to reach a deal. Senate Democrats have been blindly committed to keeping rates below 6.8 percent, while House and Senate Republicans have proposed market-based solutions that are very similar to President Obama’s proposal in his fiscal year 2014 budget request. I’m not sure I’d say there’s a demon here, but there are a lot of people in Congress who decided not to act.

3) Clare, I have to say, I follow my credit cards very closely and carefully…..And I wish I could get a credit card at 6.8 percent. Is this much ado about really nothing? A 22 year old college graduate has perhaps a 10 grand loan at 6.8 % . In the big scheme of things, it this that terrible, awful or horrible?

Ultimately, the higher interest rate won’t affect monthly payments by that much. An analysis we did last year says that the additional cost to students would be about $7 a month per loan. That adds up to about $1,000 per loan over the life of the loan.

But these loans are only available to low-income students, and they are intended to make college more affordable. A more recent analysis we did proves that 3.4 percent isn’t the best deal on the table for these students – next year, the rate under the bipartisan Senate bill would lower costs on Subsidized Stafford loans, plus it would lower interest rates on all loans for all borrowers. Still, we’re not talking about a very large difference in rates.

4) Next question, as a follow up—-I guess some students might have a $ 50,000 Stafford Loan at 6.8 % and this does seem insurmountable. Does this situation speak to irresponsibility on the part of parents, poor saving on the part of parents, or inordinate spending on the part of students?

Students are very limited in the amount they can borrow. At most, they can borrow $5,500 in Subsidized Stafford loans and $2,000 in Unsubsidized per year. That amount cannot exceed $31,000 total, $23,000 of which may be Subsidized loans. Students with more than that amount may be independent students, usually older students, who can borrow up to $57,500, with not more than $23,000 from Subsidized Stafford loans.

I’m not inclined to place blame on parents or students. If the student has $50,000 in student loan debt, there’s a lot of compelling evidence that the school failed to meet his/her needs. College costs are rising precipitously, and student loans are barely able to keep up with the amount spent. I would argue the issue centers more on the rising costs of a college education and the failure of institutions to provide enough need-based aid for their low-income students. For a great analysis of need-based aid, I would recommend this paper from my colleague, Stephen Burd, called Undermining Pell.

5) In some realms- a college education is probably a very wise investment- if the student has a 4.0 gpa and is headed to medical school or dental school or law school. Putting things into context, is a Stafford Loan, even at 6.8% a bad thing over 40-50 years of medical or dental practice?

Education is an increasingly valuable commodity. Research even shows that students who complete some college but don’t graduate earn more over their lifetimes than those with only a high school diploma. Particularly for students who plan to work in high-earning fields, the expense of college may be well worth it, even given the rising cost of tuition. For those students, the jump in interest rates won’t have much effect.

Moreover, a 6.8 percent rate on a federal loan is still better for most borrowers than a private loan at a lower rate. Federal loans offer protections, including the in-school interest subsidy that means students don’t accrue interest while they’re in school and flexible repayment options, which private loans do not provide. The interest rate is the most visible benefit to students of the federal loan program, but it is far from the only one.

6) Sadly, often parents divorce, and the losers are the kids who no longer have two parents to save money for college. Should this be addressed by divorce lawyers or attorneys?

This question is outside my area of expertise. I can say that students are eligible to borrow a fair amount of money for school, and may also be eligible for Pell Grants or institutional need-based aid if they come from low-income, single-parent homes. However, with tuition costs increasing, even two-parent homes are often unable to afford the tremendously high costs of college. The issue is broader than simply savings; the fact is that college is frequently unaffordable for low- and middle-income families.

7) I know that there is a drastic shortage of teachers in inner city schools in fields like math and science- can Stafford Loans be reduced or eliminated with inner-city school service?

There are currently several programs available to teachers. The Stafford Loan Forgiveness Program provides $17,500 in loan forgiveness to math and science or special education teachers in low-income schools, or $5,000 to teachers in other subjects. The TEACH Grant program provides up to $16,000 to students who become teachers in high-needs schools for at least 4 years, or converts to a loan if the student doesn’t complete the service period. And under Perkins Loan Forgiveness for Teachers and Head Start Instructors, institutions forgive a portion of the student’s Perkins debt for each year he works in qualifying schools or Head Start programs. You can learn more about those programs here. There is little information available on the efficacy of those programs, but they do offer incentives to students to teach high-needs subjects in high-poverty schools.

8) I washed dishes during college, waited on tables, worked the night shift and did a lot of odd jobs to get thru college and even graduate school. Is there a problem with the work ethic where students just want to attend classes for four years and enjoy intra murals?

I don’t know that this is a fair characterization. Some students attend full-time and work, and some don’t. There is some research to suggest that attending school full-time while working is a risk factor for dropping out of college. It’s also important to remember that with costs of attendance rising so dramatically, it’s not necessarily possible to work your way through school anymore, depending on the institution. Rep. Virginia Foxx (R-NC) once made this argument, but as my colleague Rachel Fishman pointed out, her tuition was $671 per semester at the time – a far cry from most public 4-year schools.

9) What have I neglected to ask?

It is important to acknowledge that this is a beast of Congress’s making. Everyone knew this deadline was approaching, and despite numerous commonsense proposals on the table, including the president’s proposal and a bipartisan Senate plan, legislators were not able to reach an agreement. Instead, it looks very likely that students will be stuck with the costs of yet another partisan argument.

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