Student loan debt, which has risen 20 percent to $1.2 trillion between 2011 and 2013 -- surpassing every other form of non-mortgage debt -- is becoming increasingly expensive.
Because the U.S. Congress failed to take action, interest rates on undergraduate Stafford loans rose today to 4.66 percent from 3.86 percent last year on both subsidized and unsubsidized borrowing. Graduate students who take out unsubsidized Stafford loans saw their borrowing costs increase to 6.21 percent from 5.41 percent. PLUS loans, which are available to graduate students and parents of college students, will increase to 7.21 percent to 6.41 percent. None of these increases, which could be negated if Congress takes action after the Fourth of July holiday, apply to existing loans.
Lauren Asher, president of The Institute on College Access and Success (TICAS), for one is worried that the increased rates may cause people to take out more risky private loans, which don't have flexible, income-based repayment and the ability for the debt to be discharged if the schools close. According to the Associated Press, the increase isn't going to hurt most borrowers. For every $10,000 borrowed, it will an additional $4 per month in payments
"We have already got $1.2 trillion dollars in student debt, so adding more to that isn't going to be welcome by our generation," said Rory O'Sullivan, deputy director of Young Invincibles, a national non-profit that seeks to educate young adults about economic issues. "We expect the rates to continue to go up over time, so the problem is only going to get worse."
The debt load of the average college graduate is about $30,000, according to O'Sullivan. About 1 out of 7 borrowers defaults on their loans within 3 years of graduation, a problem that is especially bad for students of for-profit schools. The Obama administration has taken a tough-line with the industry, arguing that it over-hypes the abilities of graduates to get jobs and under-emphasizes the debt the students incur. In fact, for-profit operator Corinthian Colleges is on the verge of collapse after the U.S. Department of Education cut off its access to student aid after more than a decade of complaints.
Last year, Congress set interest rates on student loans based on the 10-year U.S. Treasury Note plus a fixed percentage that varies depending on the type of loan. The rates, which change every year, are set for the life of the loan. They previously had been set at 6.7 percent for all Stafford loans.
Data from the Congressional Budget Office cited by TICAS estimates that the U.S. government will earn $127 billion in profits at the expense of borrowers over the next decade as loan rates continue to rise.
Student loan debt level is becoming a hot political issue as economists claim that it is having an impact on the overall economy. U.S. Senator Elizabeth Warren is pushing a bill that would allow borrowers to refinance their debt at lower interest rates. Though economists argue that these loans are having an impact on the economy, it's not easy determining what that effect may be. In a recent New York Times column, David Leonhardt argued while the issue of student debt was a problem, the notion that it's crippling most young adults financially isn't true. O'Sullivan, among others, disputes Leonhardt's claim.
According to IHS Global Insight economist Chris Christopher, debt levels are a factor that consumer considers when they get married or make major purchases such as houses or cars. "They have this huge overhang on top of a very weak economy...that sort of creates less spending on certain things."