On July 1, the interest rate for federally-subsidized Stafford loans doubled — jumping from 3.4% to 6.8%. After months of heated debate and weeks of wrangling, members of Congress were unable to coalesce on an action plan that would have reduced or avoided or delayed or the spike in interest. A last-ditch effort to reach agreement failed in the Senate on July 10 and, though there is some hope that retroactively-applied solution can be reached that would cap annual interest rate increases for Stafford loans, negotiations will likely remain ongoing.
For students who borrow the maximum Stafford amount of $23,000, the rate increase translates to $4000.00 more in interest payments over a 10-year repayment reschedule. And, since subsidized loans are designed to help those families with the greatest financial need, this rate increase targets borrowers who may be least able to absorb the rate hike.
It’s too early to tell what specific affects the increased interest rate will have on enrollment, program choice, persistence to graduation, and long-term debt loads and default statistics for students. Likewise, it’s unclear how the changing economic realities of higher education may impact families who may already be on a precarious financial footing. But taking a broad view, we’ve outlined a few realistic possibilities of how the educational landscape might evolve in response to this, and other student financial stressors:
How Students Might Respond to Higher Rates
Growing attempts to crowd-source funds. Though most students can’t take Romney’s famous advice from the 2012 presidential campaign and simply “borrow money from your parents”, they may turn to crowd-sourcing as a means to the same end.
General crowd-sourcing sites like Kickstarter and GoFundMe can be used by students to set up their own “scholarships.” Once established, students can turn to friends, family, school alumni, and even complete strangers to solicit donations to their scholarship accounts. Applied in this way, crowd-sourcing can distribute the expense of higher education across several funding sources — lessening the burden of each. The recent jump in subsidized loan rates may result in growing crowd-sourcing activity to raise funds for tuition and fees, or as a creative means to generate cash specifically targeted for loan repayments.
Increased enrollment at community colleges. We all know that many budget-conscious students choose to take their general education requirements at the community college level before springing for the typically higher tuition costs at four-year colleges and universities. But any significant change in interest rates is bound to make students and their parents take an even harder look at the bottom-line of education expenses. Based on 2012 numbers published on CNNMoney from The College Board’s, Trends In College Pricing report, the cost of tuition and fees at a community college was $3,131, while at public colleges that average was $8,655. For students who need to finance the majority of those costs, the difference is compelling.
Delayed enrollment. According to the National Center for Educational Statistics, the average age that students begin college has been gradually climbing.Higher interest rates on loans may help that trend continue.Students could choose to delay their college careers — strategically waiting until they can save more funds themselves, connect with an employer that offers a tuition reimbursement program, or simply develop greater clarity about their career goals before committing to long-term debt.
Longer education horizons. Steeper student loan rates may also lead to longer college careers for students that want to spread out their financial burden. Expect to see multi-year part-time student status as young adults try to balance school and full-time employment. For colleges, this may force innovations in distance learning programs, blended learning models, and other flexible education options.
No doubt tuition rates, financing, and debt will continue to be major issues for students and schools alike. As our politicians struggle to reach consensus, as schools attempt to rein in costs, and as students try to balance their long-term career goals with the financial realities of higher education, solutions and options will shift. As always, the best preparation comes from information — being able to meet students where they are and address the broad range of their concerns throughout the recruitment, enrollment, and matriculation cycles.
Enrollment Builders consults on a host of issues for institutions of all sizes. If you’d like more information on our recruitment, marketing, or online program readiness assessments, or if you’d like to learn more about our research and strategy services, please contact us at 513-518-7824 or request information here.