Student loan interest rates often mislead the borrower and can quickly add up over time. Interest rates on student loans should be reduced; however, this seemingly straightforward resolution results in both possible positive and negative outcomes to our economy.
According to the Department of Education, as of May 2019, direct subsidized loans and direct unsubsidized loans for undergraduate students have a fixed interest rate of 4.53%, and rates for direct PLUS loans for parents of dependent undergraduate students are fixed at 7.08%. These interest rates are exceedingly high.
In comparison, the average 30-year fixed mortgage interest rate in the United States is 3.69%, according to the Federal Reserve Economic Data.
High interest rates make borrowers less likely to invest in education, one of the most advantageous things an individual can invest in. If interest rates on student loans was lowered, the demand for student loans would increase, allowing more students to go to college and invest in their education.
The Federal Reserve could lower interest rates by increasing the money supply, but then the issue of inflation arises. A dollar today wouldn’t be worth a dollar a year from now. This is one reason why the Federal Reserve simply can’t make more money available for borrowers.
Interest rates typically increase when government borrowing goes up, so one way to reduce interest rates is to reduce government spending.
Interest rates on student loans would need to be reduced by 3-4% in order to make an impact for borrowers. This would not be beneficial for the banks and lenders and could ultimately cause bankruptcy. There would be no funds available for student loans.
If this situation occurred, people wouldn’t trust banks with their money, and there would be a shortage of funds available. The government would have to spend even more money to get banks out of debt. This would in no way be beneficial for our economy.
There is a constant debate back and forth of what should be done to these interest rates in order to satisfy lenders and borrowers. Reducing interest rates on student loans simply won’t fix the problem, but it’s important to understand how both sides could ultimately be impacted.