Prosperity Watch Issue 27, No. 2: Doubling of student loan interest rate increases cost of postsecondary education for North Carolina students and families

On July 1, 2013 Congress allowed the interest rate on subsidized Stafford loans to double from 3.4 to 6.8 percent and, unless lawmakers act, the higher rate will remain permanently. Consequently, thousands of North Carolina students and families that rely on Stafford loans to help pay for college will see the cost of their postsecondary education increase. Compounding these new costs for families, tuition costs are almost double what they were ten years ago—forcing students and their families to carry a much heavier financial burden in order to complete college than ever before.

North Carolina has long valued higher education, with tuition at its public colleges and universities historically among the lowest compared to other southern states. Since 2002, however, the cumulative average tuition within the UNC System has increased by nearly 80 percent when adjusted for inflation while state support for the UNC system has been cut significantly in recent years. For FY 2013, state funding for the UNC system is nearly 10 percent below inflation-adjusted levels for FY 2008.

 

Continued increases in tuition are likely to compel students to take on greater levels of student loan debt to help pay for their education or not purse a postsecondary education at all. For 2011, the average debt for college seniors who graduated from 4-year public and private (non-profit) institutions in North Carolina was $20,800, according to the Project on Student Debt. While this student loan debt level was the lowest among any other state in the South, a doubling of the Stafford loan interest rate means that a student with this debt load could end up paying more than double in interest costs.

Reducing the interest rate on Stafford loans makes the pursuit of a postsecondary education less costly for students and their families that rely on such loans, allowing college graduates to pay off their student debt and participate more fully in the economy much more quickly. As a result, income that would have gone towards paying additional interest on student loans would become available to purchase a home and car, and to put towards retirement savings. Low tuition and low interest on student loans make economic and financial sense.
 

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