Attorney Richard Gaudreau

Student Loan Holders Beware – Rates Scheduled to Double

The college graduating class of 2012 is scheduled to start tossing caps in the air in just a few short weeks.  But the celebrating may be more subdued because recent news has also given them the distinction as being the Most Indebited Graduating Class in U.S. history owing more than $1 trillion dollars in student loan debt.  And that mounting debt has jumped a shocking 12.4 percent in January 2012 alone.  Why the dramatic shift? Due largely in part to the 2009 recession, many students graduating with a 4-year college degree couldn’t find jobs in their fields of study and opted to head straight into a Master’s Degree program for another two to three years.  Now in 2012, those students are graduating and having to pay on the student loan debts they’ve accumulated for the last four to seven years.  And as of July 1, 2012, student loan debts are scheduled to face a substantial interest rate increase from 3.4 percent to 6.8 percent on all Stafford subsidized loans. Overall, the doubled interest rate can in effect add an additional $1,000 to the average student’s loan debt.  The debt this young generation will be paying can be substantial and potentially overwhelming unless we do something about it NOW.

According to the National Association of Bankruptcy Attorneys, the student loan debt bubble is set to burst.  Last fall, student loan debt exceeded credit card debt for the first time in U.S. history topping out at $860 billion dollars.  The default rate on subsidized Stafford student loans rose to 8.8 percent in 2009 said a report issued by the Department of Education.   The problem is that this figure relates to those borrowers who defaulted in the first two years of their loans.  A majority of the borrowers don’t see their student loan payments peak until year four and beyond.  That means that we’ll be seeing record high double-digit default rates in the next one to two years.

 

What can you do?

  • Item number one on your list is to contact your local Congressperson and Senator to express your concern and encourage him or her to take action to prevent the doubling of your federal student loan on July 1st.
  • Talk up the #DontDoubleMyRate hashtag on Twitter and Facebook to encourage your friends and family to join the cause.
  • If you are a parent of a high school student just heading into college, consider carefully the amounts your student will be borrowing and seek alternatives to traditional 4-year college programs. For example, it may make great financial sense to complete a 2-year degree at a local community college at more than half the tuition of a 4-year school.  Then attend a 4-year college to obtain the bachelor’s degree, thereby only incurring two years of higher tuition costs. There are also cost comparison tools available at the Consumer Financial Protection Bureau to help you make a more informed decision.

Even if you don’t have student loans or aren’t worried about the interest rate increase, the potential default for some 7.4 million young Americans who will not be able to keep up the increased payments will ultimately fall to you, the American taxpayer.  So in the end, we will all bear the burden of inaction.