...Student loan rates are as high as they are in part because they're risky. For one thing, there's no collateral, no home or a car a lender can repossess if the borrower defaults. The government can hardly take back someone's education.
And student borrowers do default; about 23% of recipients stop making payments on the subsidized Stafford loans Congress is fighting over. Private lenders that make student loans handle the risk by charging rates sharply higher than the government does — up to 12% or more.
These private loans come with few or none of the generous terms federal student loans offer, such as the ability to postpone loan payments until after graduation, forgo interest accrual for up to three years if the borrower is unemployed, and adjust loan repayment to the borrower's income. Compared with private loans, the direct federal loans the government makes are a very good deal, even at 6.8% interest.
OK, but rates are now at 3.4%. Won't it be a crushing blow for students if rates double?
Hardly. Rates are 3.4% only for money borrowed for the 2011-12 school year. All prior loans carry higher rates. Nothing Congress is considering would change the rate for existing loans. Congress simply wants to keep the rate at 3.4% for loans for the 2012-13 school year, loans that won't require payments until after the recipients graduate. On a maximum loan of $5,550 for a third- or fourth-year student, the difference between a 3.4% rate and and a 6.8% rate is less than $10 a month...
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