Wednesday, July 03, 2013

About that doubling of student loan interest rates

Apparently, there is a hubbub about the great increase--a doubling--of student loan rates from about 3.5% to 6.8%, and it got me to thinking what the proper rate for a student loan would be.  Is it like a secured mortgage loan, where the default rate is 2% or less, or is it more akin to a semi-secured car loan, or is it really most akin to unsecured loans like those for credit cards?

Well, with unproven credit, no particular control on the part of the lender whether the borrower gets a marketable degree, only about a 50% graduation/success rate, and a default rate of 9.1% in 2010 (some schools have higher loan default rates than graduation rates), it would seem that apart from the fact that you can't discharge student loan debt in bankruptcy, the best analogy for student loans would be that of credit card debt.  Instead of complaining about the "exorbitant" rate, students should be thanking the Good Lord that they're not borrowing at market rates from a bank.  I'm thinking that rate would be about 12-15% today.

And, for that matter, anyone contemplating taking out a student loan will do well to figure out for himself whether he's got a real shot of graduating, and whether his degree is worthwhile or not.


pentamom said...

That "apart from the fact that you can't discharge it in bankruptcy" is no small potatoes when it comes to lender risk, though.

I would think it would be somewhere in the middle -- not secured or semi-secured by an asset, but not able to be walked away from. So a little above a used-car loan, rather below a credit card.

Bike Bubba said...

Agreed that "not dischargeable" is no small potatoes, but that leads to a second question for me. If an 18 year old is not old enough to have a drink or buy a pistol, why is he old enough to contract debt that is not dischargeable in bankruptcy?

Especially when the law prohibits a banker from telling the kid "you have less than 20% chance of graduating with your grades, SAT scores, and propposed major".