Increasing interest rates lead to bigger borrowing
A study from the Consumer Financial Protection Bureau announced that total debt from student loans in this country has exceeded $1.2 trillion.
“The 20-percent increase in student loan debt between the end of 2011 and May 2013 has been much faster growth in revolving credit products, such as credit cards … an increase of less than 2 percent,” according to the CFPB article. “Student loans now comprise the second-largest form of consumer debt after home mortgages.”
One explanation of the situation is simple. Since tuition costs have been rising in recent years, students have felt pressured to take out loans in order to continue attending school.
“Since the deregulation of tuition for public universities, the increases in tuition have led many students to seek debt in order to finance their education,” said finance professor John Lopez. “As long as tuition rates continue to rise at such a dramatic rate, student loan debt will also increase.”
Statistics agree as well. Numbers collected by The College Board show that the per-year cost of attending a Texas four-year public university has increased by about $3,000 since the 2004-2005 school year. Compared to states like Arizona or Colorado, that’s a mild example. Furthermore, statistics collected by UH estimate that more than 50 percent of the school’s tuition fees were paid through a loan from a source other than a parent.
However, increasing costs are not the only cause. Some believe that increasing interest on the loans is also to blame. Government officials in recent years have been discussing the possibility of laws or measures that can reduce the impact on the borrower. Most of these, such as that signed into effect in August 2013, affect only federal loans.
“Federally subsidized loan rates continue to remain around three percent,” Lopez said. “Private lenders charge higher rates, and these are subject to increases in the interest rates in the economy.”
It’s gotten to the point where organizations such as Gotchosen.com, a multimedia and advertising startup, are looking to do something about it. Gotchosen offers scholarships that are unique in that they can be used to pay off existing student loan debt.
“The problem is not only is the cost of education increasing. Increasing interest rates mean that the cost of borrowing is increasing,” said Trish Niedergeses, Gotchosen director of scholarship operations. “Unless students are lucky enough to receive good advice, many of them may end up borrowing a lot of money and start out at a low pay scale, so they’re behind the eight-ball already.”