The interest rate on college students’ subsidized Stafford loans have doubled overnight to 6.8%. This not only adds financial burden to the 7 million students expected to take out Stafford loans in the coming scholastic year, but it could also cost the federal government. Current loans are not affected, but new loans will be affected by the higher interest rate.
The Congressional Budget Office estimates that the interest rates on the loans would generate up to $160 million profits in the coming eight years, however the research department of Barclays states that the program could add more deficit during that period which adds to more than $100 billion. This would offset any gain the government sees from the interest payments.
New interest payments will be so high for low-income borrowers that some would have their loans discharged after some payments are made, in the way the program is constructed, according to Cooper Howes Barclays analyst.
Also, a great amount of college students (much more than was predicted) could have their monthly loan repayments capped, resulting in slowing down the process of government recouping student loan payments. While the Department of Education guesses, Barclays states that it will affect more than half of the borrowers.
Barclays believes that student debt creates more danger to the government than to the economy as a whole. Mr Howes remarked that college degrees will always be worth investing, as evidence shows. He also comments on whether fixed interest rates are the best way to deal with the issue and suggests that this is looked into.