Lowering Student Loan Interest Rates Won’t Solve the Debt Crisis

student loan interest rates
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The student loan crisis leaves Americans with more than $1 trillion in outstanding loan balances. Any outsider logically argues that the atrociously high 6.8 percent interest rate on student loans is keeping college graduates in the shackles of debt.

That’s why presidential candidates are drafting plans to tackle the student debt crisis in 2016. Hilary Clinton made headlines this week with her plan to slash interest rates, saving students from debt that appears impossible to pay off.  While interest rates contribute to student loan struggle; they are probably not the cause. Here’s why.

A recent story by NPR called out the biggest flaw in Hilary Clinton’s student debt plan.

Low interest rates will benefit the wealthy.

The college graduates in the most student debt are the future doctors and lawyers of the world. Lowering the interest rate on a six figure med school student loan will go a long way–we’re talking thousands. Unfortunately, this doesn’t help out the real victims of student debt. High-earning professions like medical workers and lawyers have large paychecks, making it much easier for them to pay off student loans. They are not the ones defaulting on student loans.

Low income students with small student loans are the ones defaulting.

Sadly, the lowest-owing debtors will barely benefit from lowered interest rates. The wealthy, who are already paying off their student loans and experiencing high employment rates with higher paying jobs will benefit from lowered interest rates.

Why are the lowest-owing people defaulting on their loans?

According to Jason Delisle, director of the Federal Education Budget Project at the New America Foundation., much of the student loan default is happening with loans that are smaller than $9,000. That means the monthly payment is about $100–hardly a giant sum.

There are a few theories guessing why small loan payments have such a high default rate versus larger student loans. Many students may have participated in just a few years of college or earned credentials that result in lower salaries. Students who complete less than four years of school are known to have higher unemployment rates and low income jobs.

According to NPR, “That means letting people refinance their student loan interest rates downward is a regressive policy — one that will naturally give the biggest dollar benefit to people with the biggest balances. A 1 percentage-point cut could save someone with a six-figure balance far more money than someone with a $5,000 balance.”

As the presidential election draws closer, candidates across the board are vying for the student and post-grad vote. Let’s make sure we’re truly helping students before voting for pseudo loan reform.

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