Posted by Milton Recht:
Without Congressional action, the federal interest rate on student loans is set to double from 3.4 percent to 6.8 percent. However, a doubling of the interest rate on an amortizing loan, such as a student loan, does not double the monthly payment.
On a 10 year student loan, the doubling of the interest rate will increase monthly payments about 17 percent. On the average student loan of $24,803, payable over 10 years, the monthly payment will increase from $244 per month to $285 per month. An increase of $41 per month. about 17 percent.
Increase The Repayment Period
If our politicians were really concerned about the financial ability of college graduates to repay their student loans, they would offer the borrowers the option of extending the maturity of the loan. Allowing student loan borrowers to pay over fifteen or twenty years would do more to reduce the monthly payment burden then messing around with interest rates on the loans.
For example, the monthly payment on the $24,803 average student loan at 6.8 percent over 10 years is $285; over 15 years, it is $220; over 30 years, it is $189.
More Effective To Lengthen Loan Than Reduce Interest Rates
The monthly payment on a student loan with a 15 year repayment rate at the higher interest rate is lower than the monthly payment on the lower interest rate loan over ten years by 9.8 percent, $220 versus $244 per month. On the twenty year term loan, the monthly payment is 22 percent lower, $189 versus $244.
The obvious solution to the increasing amounts of student loan debt is to extend the term of the loan and allow student borrowers to pay over fifteen or twenty years instead of the current ten years, with no prepayment penalties and with ways to voluntarily increase principal repayments to pay off the student loan faster if they so desired.
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