2014 Student Loan Outlook: More Money, More Problems
NEW YORK ( MainStreet) One thing is clear: more people are going to be borrowing more money for post-secondary school education in 2014. Indeed, much of the cash that most students live on doesn't belong to them. It comes from a loanone that has to be repaid. And very often, those loans are not enough to cope with the rising cost of higher education.
The vagaries of the bond market and spiking interest rates will have an impact on what these loans cost in 2014. The wind-down federal government's bond buying program, a response to the 2008 financial crisis, will coalesce with a rate rise.
The impact will likely be felt from the loans themselves to college savings accounts taken out by students' families.
"The drop in bond prices could affect 529 plans, since bond funds are often used as 'low risk' options in age-based asset allocation strategies," said Mark Kantrowitz, vice president and publisher of Edvisor's Network, referring to college savings accounts. "The increase in interest rates will affect student loan interest rates. For 2014, Interest rates on federal Stafford and PLUS loans will increase significantly."
Congress re-set those rates last summerand claimed students won big because undergraduate Stafford loan rates did not double from 3.4% to 6.8% as scheduled, rising instead to 3.85%. But they are tied to the rising rates of the 10-year T-Bill.
Federal Stafford loans for grad students went to 5.41% instead of 6.8%. Federal PLUS loans, which parents sign for, went to 6.41% for undergrads and grads instead of 7.9%.
How high will they go?
"I would not be surprised if the interest rates on Federal Stafford loans for graduate students and Federal PLUS loans will exceed the fixed rates that were in effect prior to July 1, 2013," said Kantrowitz, "making it clear that the interest rate change was an increase masquerading as a decrease."
David Bergeron, vice president for higher education at the Center for American Progress is concerned that available aid will not be enough to meet the rising cost of collegenot just in the coming year, but in the years ahead.
"We know from research that for every $100 increase in the out-of-pocket cost to a student, the rate of enrollment goes down by 1%," he said. "So if it goes down by $1,000, we'll see a reduction in enrollment of about 10%. That's the kind of thing I think we have to worry about in the longer term."
Bergeron, formerly the deputy assistant secretary for policy, planning and innovation at the Department of Education, is also concerned that companies that rank colleges will continue to be importantand that their influence will be counterproductive.
"Today, U.S. News & World Report rankings drive institutional behavior in ways that aren't helpful. Getting more students to apply to a college just to raise the rejection rate doesn't seem to be a healthy approach to competition. Having an objective approach to assess performance of institutions seems more helpful than letting institutions chase U.S. News & World Report rankings."