Could Rising Interest Rates on Student Loans Actually Be a Good Thing?

I've blogged previously about private student loans and why they tend to be a bad choice (see the final point on my article about comparing forms of financial aid). Federal loans with their lower interest rates are almost always a better option than the high-interest, often restrictive private alternatives. But the current sub-prime mortgage crisis and recent Federal legislation have meant that even if students avoid private loans, they are still getting hit with the effects of a tanking economy. As John at Free College Blog points out, the credit crunch is having far-reaching effects:

[T]he recent legislative reform drastically reduces the amount of income [student lenders] are able to generate. To make up the difference, lenders are: raising rates on private loans; denying loans to students with low credit scores; or getting out of the [Federal] subsidized loan business all together.

One of the biggest advantages of Stafford and Perkins loans, and also graduate PLUS loans, is that none used to require a credit check. But with students as such big credit risks, and with lenders losing money on defaulted loans, banks are becoming more reluctant to deal with students as openly as they have in the past. This is troublesome for everyone.

Perhaps, though, the news isn't entirely dire. John goes on to make another excellent point:

In the long run, this could be helpful for tuition costs as more schools figure out business models that allow them to admit students without necessarily needing loans to pay for it.

Surely we should be cautious in praising soaring interest rates, but this point is a good one. As the cost of education continues to increase exponentially and as graduate debt follows its own upward path, colleges will soon have no choice but to dip into their endowments to make their programs more accessible. We're looking at a lot of trouble in the short-term, but there may be light at the end of the tunnel after all.

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