As a student, I find myself focusing on issue related student loans. Over the years there have been complaints related to the high interest rates involved with taking out federal student loans and how they have been negatively impacting individuals. In the recent economy, keeping up with loan repayment under high interest rates can be stressful while one struggles to get a good job and start a life. Like most issues, there is always more than one side to them. Personally, as an economics student, I see the reasoning behind both sides that others may not.
The Economist Point of View
Many people tend to forget that when it comes to how it operates, the government is like a firm. Like any firm, it is in their best interests to maximize profit. In the case of student loans, the government acts like a bank or any other firm that would issue loans. Since it is in their best interest to maximize profit, the best way to do so is to have higher interest rate on the loans they give. There is also a higher risk behind student loans for the government. They disburse loans to almost every student that applies and most undergraduates have very little qualifications when it comes to credit. Most don’t have steady jobs with high enough income or enough built up credit behind them in order to take out a private loan for college. Since they have such poor quality credit and little income, they are at a higher risk of default. For any private loan, a student wouldn’t qualify without a cosigner. Since the government is taking on these extra risks, it makes sense for them to have relatively higher interest rate in order to make up for the higher risk involved. When it comes to investing taxpayer’s money, it’s in the government’s best interest to take appropriate precautions when investing their money in students.
The Students Point of View
As a student, I find it easy to support argument towards lowering student loans interest rates. With the rising cost in education, students are forced to take out more loans. According to an article published in October 2012 by Time magazine, costs of attending a higher education institution has risen about 70 percent from 2000-2010. With higher prices comes more debt for students to pay off, and higher interest rates only make this debt even higher. With the right cosigner, a student can get a private loan for a rate as low as 2.5 percent.
Though the government is taking a higher risk with their loans, they forget that their purpose to serve the people, not make an overwhelming profit. The struggle to pay off these loans then has a negative affect on the economy. Since students have to pay off student loans on top of everyday costs, they have little money to spend for leisure that helps stimulate the economy. By the time students are at an income where they might have excess to spend, they usually have other financial needs such as mortgages, families, or retirements plans to save for. Lower rate could make it easier for students to pay off their debts in a more timely manner. To further the issue, federal student loans are fixed rate loan, making it impossible for a student to lower their interest rate as they build credit. With the rate in which student loans are accumulating and the lack of flexibility of loans and interest rates offered to students, the economy will continue be negatively impacted unless changes are made.