How big of a deal is the interest rate when Direct Student loans have a lifetime limit of $23k?
The interest rate on newly issued Direct Subsidized student loans went up to 6.8 percent as of today, resulting in a flurry of headlines, rants and discussions on the politics and financial news and social media feeds.
While it is true that the the interest rate for loans issued under that program in 2013-14 are noticeably higher than in recent years, the “new” or “double rate” is actually close to the historical interest rate that many who were in school earlier will remember.
Personally, I think the level of chatter about that program’s interest rate is ridiculously silly.
The reason is this: that loan program has lending limits that do not completely meet students’ financial needs.
A first-year / freshman student, whether financially dependent or financially independent, can sign for only $3,500 a year in his or her name under that program. The allowed amount goes up in later years so that if student finishes a bachelor’s degree in four years, the total amount signed Direct Subsidized loans is $19,000.
But the TOTAL LIFETIME LIMIT amount is $23,000. This is significant because many students do not graduate “on time.” The average for a full-time student to finish a bachelor’s degree is actually 4.7 years, and for part-time students is 5.6 years, according to the Complete College America project.
So while incoming students now have a limit of up to six years in which they can borrow under Direct Subsidized loans while working on a bachelor’s degree, they can not borrow the maximum every year. That figure would actually add up to $30,000.
To compare, according to the Project on Student Debt, the average amount of student debt among 2011 bachelor degree graduates who borrowed money was $26,600.
How many students borrow money in the first place? The Project on Student Debt reports among Michigan bachelor degree graduates in 2011, 62 percent had borrowed money along the way for an average amount of $27,451.
How do you think parents and students make up the difference between available funding, subsidized loans, and the cost of college?
They’ve been financing it through other programs such as Parent PLUS, Unsubsidized Loans and private loans, many of which had the higher interest rates all along.
For more discussion on this topic, go to my sidebar: Student loan crisis – causes and solutions. That page will take you to a special report I wrote for The Monroe Evening News in summer 2012 about the student loan crisis. I also linked up dozens of articles that explain the financial challenges faced by those who went to college during the recession years.