University of Virginia

The $3,600 solution for student loans

The hot topic of the current season is whether or not Congress should extend the subsidized (lower) interest rate on need-based Stafford loans to college students beyond the July 1 expiration date.  The subsidized rate is currently 3.4%.  After July 1, all loans will be at 6.8%, which is what the unsubsidized loan rate is at present.

But this argument totally  misses the point about student financial aid.  First, loans are not financial aid in the sense that a grant or scholarship is.  Do you call your mortgage or car loan aid? Of course not, they are just a payment plan.  That’s all a student loan is.

Second, student loan terms don’t call for payments to begin until months after the student has graduated.  The rate could be 0% or 20%, and the cash help to the student today is exactly the same.  What the student receives today is the assistance in the form of the principal amount of the loan being paid to the college he or she is attending.  The interest rate on that loan is irrelevant today.

Finally, is this good public policy?  Move ahead four years, two graduates earn their diplomas.  One has parents who qualified for need-based aid, one does not.  Why does the first student deserve a lower interest rate on his loan going forward?  They each are competing for jobs in the marketplace, using their education and experiences and talents to make a living.  Does it make sense to handicap their financial futures in such a way?

Here’s a better solution.  What is the lower interest rate on a ten year loan that starts repayment after graduation worth to a student today? Answer: $3,600.  So let’s give students that qualify for need based student loans $3,600 in aid today, and let everyone pay the same rate after graduation.