IT IS THE MATTER OF INTEREST

Student loan interest rates is quite  complex subject as the latest reports show where student loan debt has increased to $1.2 trillion in 2013.  The need for postsecondary education is greater today then it has ever been.  According to Bureau of Labor Statistics, a college graduates are nearly twice as likely to find work as those with only a high school diploma. This clearly illustrates the demand for student loans.

In the conventional markets common sense indicates to let the market determine the interest rate.  Borrowers are evaluated for their ability and likelihood of repaying the loan and interest rate is determined.  Student loans are quite a different story.  Unable to use conventional gages such as credit score and ability to repay which for most borrowers is yet unknown, how should the interest rates be determined for student loans?  Or should market supply and demand determine it?

In my opinion, with such an “inelastic good” as student loans, it is one of the rare situations where I would support government intervention on capping the interest rates.  Based on current offers on the table, it seems that President Obama’s suggestion will benefit future borrowers of student loan debt the most: In his budget, President Obama used a variable model to determine loan rates at the point they are issued. After that time, the interest rates remains fixed for the duration of the loan.

Ultimately, we would want to focus on the bigger picture and that is to eliminate the need for student loans or at least try to cut down on the amount borrowed by each student. In mean time, it is the plan President Obama suggests that will help avoid insolvency and possibly another financial disaster caused by uncontrolled borrowing.