Students to Face Even Higher Interest Rate Charges After RPI Increase
20th Apr 2018
In recent months, StuRents has followed developments in the UK student loan space closely. We firstly took a look at the sale of UK student loans to Erudio and the impact this could have on students. In the wake of the recent local council and European elections, StuRents then analysed the next potential direction for UK student tuition fees, that has and could continue to put mounting pressure on student loan default rates. It was highlighted here, and in the more recent article on the burden of student debt that the figures will be increasingly pressured by high tuition fees and a continually challenging job market.
Whilst our focus therefore in recent months has been on our home market, the UK, we ignored the fact that exactly the same story is unfolding across the pond in the US. US growth in student loan debt has soared over the last 20 years.
Both rising tuition fees and a higher share of students borrowing have had a meaningful part to play in the growing burden. Data from a recent report by Brookings highlights that from 2002 to 2012, real, inflation-adjusted college costs rose by 16%. To add insult to injury, the chart also indicates the extent to which enrollment has increased over same period, a similar trend to that seen in the UK higher education market.
It is therefore no surprise that President Obama is taking executive steps on student loans. On Monday, Obama announced the expansion of his "Pay As You Earn" program that lets borrowers pay no more than 10% of their monthly income in loan payments. The change intends to open the scheme to those who borrowed pre-2007, potentially expanding the programs reach to millions more borrowers.
Further, Obama has amplified his call for lawmakers to pass legislation that would let college graduates with heavy debts refinance their loans. It is expected however that this proposal will face strong opposition when debated in the Senate.
It is clear that many challenges lie ahead both in the US and UK on dealing with the growing student debt burden. Much academic research has already been done, and no doubt much more will follow on the real impact this growing burden has on the wider economy. The extend to which it impacts higher education enrollment, the property market and the job choices students make on graduated are all still up for debate.
One current saving grace is that interest rates have and will, for the foreseeable future stay low and largely steady. Into the medium term, rising interest rate will have an increasing part to play in student default that is currently taken for granted.
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