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The Cost of College Will Soar if Interest Rates Allowed to Double

The Cost of College Will Soar if Interest Rates Allowed to Double

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Jennifer Mishory, Rory O'Sullivan, and Tobin van Ostern on what happens if Congress allows the student interest rate to double.
Jennifer Mishory, Rory O'Sullivan, and Tobin van Ostern on what happens if Congress allows the student interest rate to double.

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Published by: Center for American Progress on Apr 25, 2012
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04/26/2012

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1Center or American Progress |  The Cost o College Will Soar i Interest Rates Allowed to Double
 The Cost of College Will Soarif Interest Rates Allowed to Double
Congressional Inaction Would HarmMillions of American Students and Families
Jennifer Mishory, Rory O’Sullivan, and Tobin Van Ostern April 2012
More han 7 million sudens and heir amilies rely on Subsidized Saord Loans ohelp pay or college. Te loans disribued by he U.S. Deparmen o Educaion cur-renly hold an ineres rae o 3.4 percen. Bu ha rae is se o double i Congress ailso ac by July 1, 2012. I ha occurs, millions o sudens will see heir ineres raes soaro 6.8 percen on he new loans hey ake in he nex year hereby causing a seep rise inheir loan burden and eecively increasing he cos o ataining a college degree. A aime when uiion is rising a 8.3 percen a year and median wages or young people arealling, young Americans and heir amilies can ill aord more Washingon inacion. I Congress allows he ineres rae o increase:
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7.4 million sudens will see heir college coss go up—abou one ou o every hree college sudens in he counry.
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Te increase will cos he average college suden abou$1,000 more per year o school.
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 As a resul, he cos o college or he average borroweraking ou ull Subsidized Saord Loans will increase by 20 percen nex year.
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Tis increase comes a a ime when American amilies arealready sruggling nancially, and having a college degreeis more imporan han ever beore. Given he imporanceplaced on a college educaion and he signicance o higher educaion o a naion’s economic compeiiveness,i is unsurprising ha in a recen poll 92 percen o youngDemocras and 78 percen o young Republicans say haincreasing nancial aid and making loans more aordableor college would help make he economy sronger.
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FIGURE 1
Rise in cost of college
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Source: Calculated using average public school tuition from: College Board, “Trends in CollegePricing 2011” (2011). Average loan amounts for graduates from: Matthew Reed, “Student Debtand the Class of 2010” (Berkeley: The Project on Student Debt, 2011). Total cost of collegeincludes interest costs over the life of estimated loans, assuming all borrowers first maximizesubsidized Stafford loans before switching to unsubsidized Stafford loans. We assumeconservatively for cost purposes that all are juniors and seniors and can therefore take out$5,500 yearly in subsidized Stafford loans. Projections are made assuming a tuition growth rateof 8 percent per year and a debt load growth rate for graduates of 6 percent a year.
$0$2,000$4,000$6,000$8,000$10,000$12,000$14,0002007-082008-09 2009-10 2010-112011-122012-13With current interest ratesWith interest rates doubled
 
2Center or American Progress |  The Cost o College Will Soar i Interest Rates Allowed to Double
 The real impact on families
Doubling ineres raes will cos he average suden andheir amilies approximaely $1,000 more or each year inschool.
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Tis increase comes a a ime when uiion has beenrising a 8 percen per year on average.
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Sudens are acually paying more han he cos o uiion when loan inerespaymens are acored ino he equaion. Tose
 
 borrowersrelying on Saord Loans will see a 20 percen increase inhe eecive cos o college nex year.
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 Millions o sudens and heir amilies will be impaced by his change. Tere are 20.5 million college sudens in heUnied Saes and o hose, an esimaed 7.4 million su-dens ake ou Subsidized Saord Loans.
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In oher words,one in hree sudens will see heir ineres raes double.Tis increase in he cos o college will hi sudens andheir amilies a a ime when young aduls have sruggledo nd work and wages have sagnaed. Median weekly earnings or 25- o 34-year-olds have allen 5 percen since2001. Te resul is ha young aduls are less able o pay heir suden loan deb even as he amoun hey owe balloons wih rising uiion. Tis willmake i harder or young aduls o aord college a a ime when having ha college degreeis more essenial or employmen han ever.
Young Americans support increasing financial aid and makingcollege loans more affordable
Given he increasing imporance o a college degree and he seep rise in he coso college, i is unsurprising ha he Millennial generaion wans Congress omake our economy sronger by making college more aordable. In ac, in a pollconduced las year, 92 percen o young Democras and 78 percen o youngRepublicans say ha increasing nancial aid and making loans more aordableor college would help make he economy sronger.
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Overall, 88 percen o young Americans saed ha increasing nancial aid and making loans more aordableor college would help make he economy sronger.
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FIGURE 2
Percent growth in tuition versus percent growthin wages of 25- to 34-year-olds
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Source: Current Population Survey, United States Bureau of Labor Statistics (2001-11), Trends inCollege Pricing, supra note 1.
0%20%40%60%80%100%120%140%160%180%200%20012002 2003 2004 2005 2006 2007 2008 2009 2010 2011WagesTuition at public four-year school
 
Source: State of Young America: The Poll, supra note 4.
TABLE 1
Support for increasing financialaid and making college loansmore affordable
Percent who support
All (18-34)88%18-2490% 25-3487%Men84% Women92%White86% African American96% Democrat92%Republican78%Independent93%Latino92%

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Joe Faries added this note
Education is clearly a toxic access directly because of our inverted socialism (American Capitalism). Increasing interest rates are a moot point when you look at the cost of education interest free. By increasing the loan supply without regulating prices, prices balloon out of control. The original American Dream exploded, the new one (education) will as well.
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