Graduate student loans to lose interest subsidy

Monday, November 7th, 2011 By

Loan Debt

Student loan debt, for graduate students, is about to get much more expensive. Image: Flickr / a.mina / CC-BY

Subsidized student loans are the government’s way of encouraging students to pursue education. As of 2012, however, graduate student loans will no longer have their interest subsidized, which will shift responsibility for paying $18.1 billion over 10 years to students.

The interest shift

As a part of one of the many debt deals made over the last few years, Congress negotiated a new limit on student loan debt. Graduate student loans will lose their subsidized status, meaning that the loans will accrue interest while the student is in school, and the student will be responsible for that interest. The deal does not change borrowing limits, but it does change what students are responsible for in the end.

The cost to students

For graduate students, this means borrowing money to pay for school will be more expensive. If a student borrows the full allowable amount, this adds approximately another $200 per month in interest payments. These are payments the government would have ordinarily paid during the years of schooling and up to six months after graduation. The deal also eliminates a credit on the loan that students receive if they pay on a loan for 12 months without missing a payment.

Increasing indebtedness of the young

For young people, this change to the student loan process could increase the debt gap between older and younger Americans. There has always been a gap between the net worth of older and younger Americans, but it has been getting larger. Currently, a household headed by someone 65 or older is likely to have a net worth 47 times that of a household headed by someone 35 years or younger. This disparity is in contrast to a disparity of 10 times 25 years ago. Student loan indebtedness is pointed to as one of the major causes of this disparity, as is the difficult job market. This move by Congress to increase the cost of higher education loans is likely to make this gap even worse.

Sources

Mint.com
CNN Money
The Fresh Xpress
CBS News

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