Home>Video>College Expectations, Loan Rates at Crossroads

College Expectations, Loan Rates at Crossroads

Wed, 12 Jun 2013

Debates on Stafford Loan rates continue in Washington as the July 1 deadline approaches, while this year's college grads might be too optimistic of near-term job success.

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Video Transcript

Christine Benz: Hi, I'm Christine Benz for Morningstar.com, and welcome to College Radar. A popular type of college loan will become more costly unless Congress takes action soon. Joining me to discuss this and other college funding news is Adam Zoll. He's assistant site editor for Morningstar.

Adam, thank you so much for being here.

Adam Zoll: Thanks for having me.

Benz: Adam, we have discussed the Stafford Loans in the past. The deadline is July 1. Congress has to come up with some kind of resolution, otherwise the interest rate will double. So, let's talk about where this loan is right now. Where it is in Congress and what the differing views are on what the rate should be.

Zoll: First of all, we're talking about just the subsidized Stafford Loans, so these are lower-rate loans that are available to low- and middle-income students, and right now, those students pay 3.4% on those loans. Once they graduate, that would double to 6.8%, which is the regular Stafford rate, on July 1, for new loans, for this coming school year, if Congress does nothing. Now, right now in the House, there seems to be widespread agreement that nobody wants these rates to double; however, there's no agreement on the solution. House Republicans have voted a package that would basically tie these rates to market rates, to the 10-year Treasury plus, I believe, 2.5% for undergraduates. The president also wants to tie the rates to market rates, but he wants a subsidized rate that would be 1 percentage point above the 10-year Treasury, and an unsubsidized rate that would be 3 points above Treasuries. Then Senate Democrats want to keep the status quo for another two years. So, again, there's no agreement on what's going to happen other than the fact that nobody seems to want these rates to double overnight on July 1.

Benz: So, it sounds like it's going to come down to the wire like so many things in Congress have been recently. I guess, if I'm looking at these different ideas, which will be the most friendly for college borrowers? Do you have a sense of that or does it depend on what happens to interest rates down the line?

Zoll: Well, you could look at the near term or look at the long term. In the near term, tying the rates to market rates, the lower the markup the better. However, for the long term people are getting nervous about rates starting to increase, so down the road there could be concern about that.

The president's plan is a little different than the Republican plan in that rates change from year to year, but once those loans are made, the rate is set. The Republican plan would continue to keep those rates variable year to year, but there would be an 8.5% cap on many of those Stafford rates. So, it's a little tricky to say which loan would be most beneficial for borrowers, but there's a lot of different sort of balls in the air right now.

Benz: We'll keep an eye on this one. Another bit of sobering news came from an Accenture survey. It sounds like a lot of new grads feel like they really haven't gotten their money's worth from their college education yet. Let's talk about that.

Zoll: Yes, this new Accenture study found that 40% of new grads, these are people who graduated in the past two years, say that they are in jobs right now that they did not basically need to get a college degree to have. And of course, we've seen it's a very tight labor market; a lot of graduates have moved back in with their parents. So, these are tough times for recent grads. Nearly two thirds think that they will have to return to graduate school or get additional training to get the jobs that they actually want.

One of the other interesting findings in this survey is that current students scheduled to graduate during this spring graduation season, only 18% of them expect to go to grad school, whereas those who have been out in the "working world" for a couple of years, 42% of them expect to go back to graduate school. So, there's a little bit of a disconnect between maybe expectations to have to get additional schooling, when you're in school, and probably anxious to get out of school versus once you're out in the working world and probably thinking about improving your situation.

Benz: Adam, this is probably sobering news for parents who thought that they were done after they had paid for four years. It sounds like some students are expecting that that college window would go beyond four years.

Zoll: Well, I think it's a reminder that sometimes your college planning has to go beyond just the undergraduate experience for more lucrative careers. In many cases, you are going to need additional training and possible graduate school. And so, while it can be a stretch to even afford four years of college these days, having graduate school in the picture in some cases is not a bad idea.

Benz: One positive bit of news on the college funding front relates to private schools, making school more affordable for some families, let's talk about the data there.

Zoll: Right, well, a new survey from the National Association of College and University Business Officers found that the discount rate, which is the rate at which private colleges discount tuition to students, is actually at an all-time high of 45% for this current school year. So, what we've been hearing a lot about is actually that a lot of private schools are facing enrollment challenges. They are not filling the classrooms; they are having a hard time getting the number of students to come and attend their colleges as they have in the past. And as a result, they are having to make better offers for financial aid. And we're talking in this case about scholarships and grants. This is not aid that needs to be repaid like a loan would. So, they are making more competitive offers you could say to students to get them to come and fill out their student rosters.

Benz: You noted though, and there is some fine print here, that this doesn't necessarily apply to those very top-echelon schools?

Zoll: That's right. The top-tier schools still are very competitive to get into. They don't need to discount to the degree that some other schools do. So, you may not have as much luck for example negotiating a lower tuition with a very competitive school. However, people who maybe are not even considering private school as an option because of the higher sticker cost or published cost may want to look at these discount-rate numbers and give them a second thought because in many cases, for example, students from upper-income families who may not quality for grants and scholarships and other forms of financial aid at a public university probably have a better chance at a private school. And once you factor in all of the actual net costs, it could be just as competitive.

Benz: So don't just assume that you can only afford public university. You should shop around and look at some of the smaller private schools, as well.

Zoll: Absolutely.

Benz: Thank you so much for being here, Adam.

Zoll: Thanks for having me.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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