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Student Loan Rate Deal: Spared, Then Stung

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As it turns out, Congress was able to get enough of its act together to resolve the subsidized student loan rate impasse—at least until next summer—but with a catch.

It used to be that eligible undergrads enjoyed a six-month interest-free grace period in between the time they tossed their tassels and the due date for their first loan payment, courtesy of the federal government. No longer. This last-minute deal forces subsidized Stafford borrowers to bear that cost.

What’s the damage? Well, for undergraduates who’ve borrowed the max under the program, the bill comes to $347.16.

While at first blush this may not sound like a lot of money, consider the larger problem: tuitions are continuing to increase, schools are cutting back on scholarships and grants, and college grads are still having trouble finding the good-paying jobs they need to pay the bills they’ve amassed.

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Check Your Credit For FreeIn fact, this entire debate about “rate subsidies” is, in my view, thoroughly disingenuous. I say that because in this context, the term “subsidy” connotes below-market. While this may appear to be the case when government rates are compared with those that the private lenders typically charge, it most certainly does not mean that the DOE is taking it on the chin by offering something better.

As I’ve explained in a previous article, these loans are profitable, even after factoring in the cost of the interest that’s being covered by the feds while its subsidized borrowers are still in school—whether or not it does so for an additional six months.

Consequently, I can only conclude that the degree of that profitability was the point of contention. By extending the lower rate, the student loan program’s revenues wouldn’t be as high as they would have otherwise, which helps to explain why Congress was casting about for a way to make up the difference.

That’s truly unfortunate because our lawmakers’ time would have been better spent addressing the more pressing needs of the 10% of the borrowers who’ve defaulted on their loans, not to mention the 27% who are unable to keep up with the payments.

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