Student Loan Debt Exceeds One Trillion Dollars

President Obama wants Congress to extend the 2007 College Cost Reduction and Access Act, which would freeze interest rates on subsidized Stafford student loans for one year. Melissa Block speaks with Mark Kantrowitz, a student loan expert and publisher of FinAid.org for a primer on student loans and repayments.

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MELISSA BLOCK, HOST:

The nation's student loan debt burden is massive. It now exceeds a trillion dollars. That's more than the nation's credit card debt. Mark Kantrowitz joins me for some background on these loans. He's the publisher of FinAid.org, that's a website about paying for college. Mark Kantrowitz, welcome to the program.

MARK KANTROWITZ: Thank you for having me.

BLOCK: And let's start by explaining just what these loans are. They're called Stafford loans. What are they, and where does the money come from?

KANTROWITZ: Stafford loans are federal education loans. They're the most popular form of federal student loan. The money comes from the U.S. Department of Education or the taxpayer, and is lent to students to help them pay for college.

BLOCK: So, lent directly by the federal government - in other words, not going through a bank?

KANTROWITZ: The money comes directly from the U.S. Department of Education's direct loan program. Banks have no longer been involved in the federal loan program since July of 2010.

BLOCK: Okay. And how many student borrowers are covered by these loans?

KANTROWITZ: Undergraduate students, about 7.4 million borrowed from the subsidized Stafford loan program last year.

BLOCK: What is the average size of a Stafford loan? And if the interest rate does double, how much of a jump would that be for that average loan?

KANTROWITZ: The average, one-year subsidized Stafford loan is about $3,300. The average subsidized Stafford loan debt at graduation is about $9,000. So on a typical student for one year's loan will pay an addition $670 over a 10-year repayment term.

BLOCK: If the rates do double.

KANTROWITZ: Right. And on that $9,000 cumulative debt, if they continue for the full education, that would be about $1,800 of additional interest paid.

BLOCK: Okay. Well, if Congress does let the interest rates on these Stafford loans double in July, from 3.4 to 6.8 percent, is that going to just affect new borrowers or would everybody who already has a Stafford loan - maybe already paying that loan back - also take a hit?

KANTROWITZ: The doubling of the interest rate affects only new loans that are made on or after July 1 of 2012. Existing student loans are not affected. They stay with whatever rate they have.

BLOCK: When they decided to cut the interest rate for the Stafford loans and set this sunset period, basically, of when that cut would expire, what was the thinking behind that?

KANTROWITZ: Cutting the interest rates on student loans is extremely expensive. This came out of the 2006 pledges from the Democrats to slash interest rates in half. But when it came time to pass legislation to implement that campaign promise, they found that doing it for all student loans would be too expensive. So they cut it back just to undergraduate students, and then just the subsidized Stafford loans. And then they did a phased-in interest rate reduction instead of an immediate reduction in order to reduce the costs.

And even so, it's very, very expensive. Just one year's loans cost $6 billion. So they had to have a time limit on it. And it seems that it was perfectly timed to expire in an election year. Just as this original proposal was during election year, the expiration is in an election year, as well.

BLOCK: If the interest rate freeze expires and the interest rates do double, conceivably might it make students say, you know, given what I'm going to have to pay coming out, I'm going to have to find a school that just doesn't cost as much?

KANTROWITZ: Well, certainly, parents and students are getting more sensitized to the real costs, the bottom-line costs of college. We're finding that they are focusing more on two factors: What is the net price of this college? How much is the college really going to cost me, or how much debt am I going to have to take on to attend this college? And what is the return on that investment? If the difference in the net price is only about $1,000 or less, they'll choose the better college.

If it's more than $5,000, they'll choose the less-expensive college. And in between, they agonize over the decision.

BLOCK: I've been talking with Mark Kantrowitz. He's the publisher of FinAid.org. That's an online guide to student financial aid information. Mark, thanks so much.

KANTROWITZ: Thank you for having me.

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