Unless you’ve been living under a rounded stone, then you know about the possibility that Stafford Loans (the federal student loan mechanism) could see their interest rates increased from 3.4% to 6.8% on July 1st. This means that current and future students would have higher interest rates on the money they borrow for college. There is outrage. Absolute outrage.
The outrage is misguided. If you will for a moment, suspend your outrage and look at the college cost problem from a different perspective. The average student will suffer an economic loss of $1,000 based on the rate increase. This means that a hypothetical education will cost $1,000 more than it did prior to the rate increase. (People that currently hold student loans aren’t really affected). The solution is simple, yet immediately dismissed. Take out fewer student loans.
I have studied peoples’ spending and borrowing habits for nearly 15 years, and I can say without a doubt, that people that get angered about interest changes are people that look immediately to debt for solutions. At some point in the last 30 years, the solution to every economic problem in this country became borrowing. Can’t afford a car? Borrow. Can’t afford surgery? Borrow. Can’t afford a TV? Borrow. Can’t afford fast food? Borrow. Our collective financial sensibility has gone to hell.
We look at challenging financial situations and immediately come to the conclusion that we must borrow. The government does this, and the citizens of this country do this. If you are getting heated while reading this, then this newfound debt complacency has started to trickle into your mind. The absolute last resort should be to borrow money for college or anything else we can’t afford. But it’s NOT the last resort. It’s the absolute first thing we do. Show me a student that finds a way to pay for college without immediately turning to loans, and I’ll show you a young person that I will immediately hire. In fact, I just hired a young lady who refuses to take out student loans to fund her education. Her determination isn’t short-lived. Why aren’t we teaching young people how to scrap? Instead, we teach people to bitch about student loan rates.
There’s another piece of legislation on the table in Congress called the Student Loan Forgiveness Act. It’s a RIDICULOUS piece of legislation. Yes, several people across the country are struggling to pay back the crazy amount of student loans that they took out in college. But how is that the government’s problem? If I get a tattoo on my neck that I later regret, should the government step into pay for its removal? I had a young lady in my office the other day that had an “extra” $12,000 leftover from her student loan check. She went on Spring Break with it, fixed her car, and paid for a relative’s cell phone bill. I would be beyond salty if my tax money went to pay for her student loan forgiveness.
In my book, Avoid Student Loans, I write how the average student can save thousands of dollars by simply taking the correct high school courses. Why isn’t that being talked about? Why isn’t there outrage about the choices being made by the people? If you blame the government for everything, then this nation is doomed. Our future is dependent on our individual choices.
What about all the kids out there hustling? Our lives are defined by our decisions. If we are constantly bailed out for poor decisions, then we will never learn from our mistakes. The solution isn’t to forego college. The solution is to take out less student loans. The solution is beyond simple. Yes, you have to work hard to replace student loans with actual earned income, but the alternative is unacceptable. Well, at least it should be.
We will never progress forward if we are constantly looking for other people to solve our problems.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
8 thoughts on “The Stafford Loan interest rate discussion is missing the point”
It’s a strange thing for the government to be in the business of loaning people money for anything, education or otherwise.
But the government is also in the business of providing education. In fact, the vast majority of college students (see http://www.infoplease.com/ipa/A0908742.html) are in public schools. And the cost of education is rising WAY faster than the rate of inflation. (http://inflationdata.com/inflation/inflation_articles/Education_Inflation.asp). So, the government is complicit at both ends.
I know you want to encourage people to go to college and do so with less debt. Students can work, they can seek scholarships, but here is a FACT that I feel is missing from this argument:
***It is harder to pay for school TODAY without resorting to debt than it is ever has been, and it’s ONLY GETTING HARDER every day.***
Certainly loan forgiveness and higher interest rates are NOT the answer, but can we at least agree that the problem is not “kids these days” and their “sense of entitlement”?
The problem is that college costs are out of control, and the individual strategies for dealing with that rising cost are therefore becoming less and less feasible every day.
Getting (and providing) an education has become a commodity and a profit center. Where there is money to be made you know that uncle wants to get involved.
“I write how the average student can save thousands of dollars by simply taking the correct high school courses. Why isn’t that being talked about? ”
Why? Because there is no money to be made in sensible thinking like that.
I went into college with the determination to not get into debt. As it turns out, due mostly to some medical expenses – ironically stemming from my 60+ hour work weeks while taking 19-21 credits – I had to take out one loan of $5,000. I weighed sitting out a semester and losing momentum while still having to pay living expenses (as I permanently left my parent’s house when I was 17), or taking out a small loan. And I believe it was the right decision for me at the time, having exhausted all other resources. I did and still do live frugally.
But last week I got hit with the news I had a hole in my retina. At 25. I had to quickly have an expensive laser procedure, or have a constantly heightening risk of losing my vision. While insurance should cover about 80%, this is still going to deplete my reserves. Additionally, I was also told I have several weak spots in my eyes, so this could happen again any time.
I work in an industry where good insurance is difficult to come by, at least in starting positions (yay, media!). My current insurance expires soon. I’m looking into lots of options, from co-ops to emergency insurance to payment plans (this procedure is covered my medical insurance, not eye insurance).
You say, no loans to cover surgery. So here’s my question: do I pay out the nose for really good insurance for the rest of my life, just in case? Do I buy just bare-minimum emergency insurance and work out a payment plan with the eye doctor if this happens again 3 years down the road? Worst come to absolute worst, is it better to take out a loan to cover the insurance now or the procedure later? Do you know any single, marriageable people with great insurance and the option to add a spouse?
OK that’s a lot of questions, but I’m still reeling a little bit. Thanks for bearing with me!
You can always move to another country where there is a single-payer system for this kind of stuff.
Pete would not recommend this, but medical debt is the one kind of debt that you should not be afraid of. So, don’t borrow money to buy insurance, but do borrow money (from the hospital if possible) if you need to pay for life-saving services you can’t afford later.
I’m usually not very critical, but your advise is seriously:
A: move to another country
B: feel free to go into as much debt as you want to
This does not seem like sound advice to me.
To the OP: you are in a very difficult financial situation. The $5,000 student loans are the least of your debt problems. If you have a major medical situation and no insurance, you should seek the help of a financial professional to determine the right course of action for your unique situation.
To Robby – I did not mention ‘moving to another country’ as one of the options, because it’s not one, for me. I have enjoyed visiting other places, but I’m not interested in moving elsewhere, and certainly not just to solve a money issue (not to mention, it wouldn’t solve any *overall* money issues). I do realize the current insurance system in the US needs an overhaul, but the one I believe it needs, it’s not going to get any time soon.
Christian: to clarify my original post: my loan is payed down (to about half), and I have insurance that covers a decent bit of the eye procedure this time around, and enough in savings to cover the rest. What I’m asking is, what is the best thing to do now, in case this happens again 3 years down the road. To get insurance as good as the one I’m about to lose would be very, very expensive. I don’t have access to an employer-subsidized insurance. So, is it best to somehow tighten my belt even further and cough up bundles of money for something I may or may not ever need, should I stick with emergency insurance and try to put aside money in case I need another procedure again, etc.
Thankfully, right now I’m searching for the best preventive care, not a cure for something that’s already happened.
I agree with Pete on most things, but I think I disagree on this.
Your health is more important than your money.
Your LIFE is more important than your money.
Debt should be avoided, unless the options are (a) go into debt or (b) suffer a serious medical condition or worse.
In Melanie’s situation, my suggestion would be to buy the low-cost insurance and try to self-insure.
There’s nothing to disagree with. I never said you shouldn’t borrow money for medical expenses. I simply said that it’s become our nature to borrow money for medical expenses.