Unraveling Federal Student Loans

Federal student loans apparently are simple loans to students to cover their tuition fees at colleges; however, unraveling them brings out the true face of these loans that are appreciably uncomfortable. Unfortunately, today most of the students pursuing a college degree are dictated by the federal student loans with a 3.4% APR that have far reaching consequences in their lives. Senator Elizabeth Warren, apparently moved by this “unfairness” to the students, has introduced a bill that suggests the interest rate to be lowered down to 0.75% on federal student loans; same rate the banks pay when they borrow money from the Federal Reserve Bank.

Warren and her supporters are foreseeing an increase in the interest rate for student loans that would reach 6.8% soon implicating higher financial burden on these students. The drive for fairness seems to derive from the discrepancy between the rates the banks pay and the rate the borrowers of student loans pay. The legislators of the federal government have tricked people so many times that the concerned students and their parents should analyze the implications of Warren’s bill if it becomes law. Any act or legislation that has economic perspective has an immediate consequence that is readily visible; nevertheless, there are consequences that emerge subsequently and are not immediately perceived.

The following may be predicted to happen if Warren’s bill becomes a law:

1. Low interest rate will create more demands for federal student loans as students will be able to borrow more money at a lower rate.

2. Students’ upfront borrowing cost will be significantly reduced because of lower interest rate.

3. More students than usual will seek spots at colleges and universities because they have the financing available.

4. The colleges and universities will raise the tuition fees faster than the inflation adjustment because of increased demand for college degrees.

5. As higher tuition will increase college incomes, the faculty members will receive increased salaries and that will boost the construction business on campus.

6. Higher tuition fees will make the students stretch their expenses beyond their credit limits and the maximum they can borrow now is $20,500 a year.

7. Special interest groups promoting higher education will lobby for an increase in the amount of federal student loans.

8. As consumption of student loan increases, the interest rate will go up to meet the higher demand.

9. Students will be indebted more than ever before.

10. Special interest groups promoting higher education will again lobby for lowering the interest rate on student loans.

A review of the foregoing predictions reveals some kind of vicious circle that begs the very question of “fairness” to students. So far, the financial burden of higher education has been shared by the students or by the federal government (in the form of subsidy); the colleges and universities do not seem to demonstrate any responsibility for that matter. Their raising of tuition fees every few years has to be stopped. Instead of making it look like a commodity, higher education should be presented as one of the finest services these institutions are able to provide.

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