The Fitch Group announced this week that it believes fixed-rate private student loans just might be the answer to kick-starting the loan industry. The company, though, does temper this advice with the warning that competition from variable-rate private loans and fixed-rate government loans could be a stumbling block.
The Fitch Group is one of the “big three” credit rating agencies that control nearly all of the credit rating market. The company made its student loan proclamation on its Fitch Wire credit market commentary page, where it cited new fixed-rate private loan offers from Sallie Mae and Discover Financial Services as evidence that those types of loans can fuel loan growth. Sallie Mae’s new loans are offered with interest rates ranging from 5.75% to 12.875%, depending on credit score. Discover’s loans will be offered at a starting interest rate of 6.79% From the Fitch Wire statement:
These rates compare favorably to the 6.8% rate offered on a government Stafford unsubsidized student loan and the 7.9% rate offered on a government PLUS loan, both of which also come with origination fees. Additionally, while the new loans have a higher cost than the current 3.4% rate on government subsidized Stafford loans, that rate is scheduled to double, absent Congressional extension, to 6.8% on July 1, 2012 as part of the College Cost Reduction and Access Act of 2007.
This loan increase, which is distressing students, could make private loans very attractive in the future. There has been talk in congress, however, that student loan debt is so out of control that it might need to be waived for some students. Not even a bankruptcy can currently relieve a former student from student loan debt. Fitch warned in its message, though, that it believes pardoning student loans would inevitably increase the price of private loans.
Student loan forgiveness is a hot button issue in America right now and there are many voices on each side. One side believes that given the state of the economy and the vanishing of middle class job opportunities, we need to shift towards a more forgiving approach such as loan forgiveness or Income Based Repayment (IBR). On the other side you have people who believe that students should be able to pay back their debt and be responsible despite oppressive external factors.
Here are some not so fun facts from the U.S. News Student Loans Ranger blog about student loans and the necessity of going into debt to function as an American citizen:
Total outstanding student loan debt officially surpassed total credit card debt in the United States in 2010, and is on track to exceed $1,000,000,000,000 during 2012.
Excessive student loan debt is impeding economic growth in the United States. Faced with excessive repayment burdens, many individuals are unable to start businesses, invest, or buy homes.
Because of soaring tuition costs, students often have no choice but to amass significant debt to obtain an education that is widely considered a prerequisite for earning a living wage.
On March 8, Congressman Hansen Clarke (D-Mich.) introduced H.R. 4170, the Student Loan Forgiveness Act of 2012.
Clarke exclaimed that the bill, “provides that if a student loan borrower makes payments equal to 10% of their discretionary income for a period of ten years the balance of their federal student loan debt will be forgiven. This provides student loan borrowers with a second chance for those who have been struggling financially and by cutting this debt to freeze up the money to invest on that will create new jobs across the country.”
The congressman had the House’s full attention as he passionately stated, “It’s time for congress to stand for the rights of student loan borrowers. It’s time to forgive student loan debts.”
Regardless of where you stand on the issue, the fact remains that student loan debt has been destroying an entire generation: “an entire “lost generation” is not starting families, buying cars, getting mortgages or otherwise contributing economically in the ways previous generations did. And by all accounts, the problem is actually way worse than even shrill news reports indicate- young people are drowning in a sea of debt before they ever have a chance to pay back the first cent.”
If the bill is passed interest would be capped at 3.4%, half of what it is currently, and would go into effect later this year.
It is thought that this bill would still hold borrowers responsible to pay back their loans and create opportunities for the 25-40 crowd to stimulate the economy.
Besides, if the economy really is getting better and the elusive good paying jobs resurface, then borrowers will be able to pay back most of their debt, right?
One person who was fortunate enough to receive a full ride is really ticked about the plan and posted on YouTube:
“Wow, good thing I did the responsible thing and got both my degrees on full scholarships. If I’d known about this garbage, I’d have gone to an Ivy. So much for personal responsibility. Maybe I’ll go risk all my savings in stocks I don’t understand. Surely Obama/Bernanke will come to my rescue. Most of us are taught personal responsibility when we’re growing up. Then we get older and realize most of the adults who taught us these values were busy ripping each other off our entire lives.”
But another person fired back after finding this individual to be a bit snooty:
“Lucky you. Lots more of us hardworking folks that had 4.0s all through college, have a decent sum of student loans and pay over 60 percent of our monthly income to student loans highly disagree with you. It’s not like it’s a free ride, it still requires ten years of payment. Please get off your high horse and have some empathy for honest work.”
Where do you stand on the issue? Do you think that most people are capable of finding good paying jobs to pay back their debt without reforms such as this one? Do you have a personal story that you would like to share?