Interest Rates on Student Loans Could Go Up From U.S. Credit Downgrade

Interest rates on student loans for higher education could increase as a result of Standard & Poor’s downgrade of U.S. credit from AAA to AA status, leaving borrowers who already face increasing tuition and debt in an even tougher position.

Current federal student loans will be unaffected by market volatility because their interest rates are fixed at 3.4 percent, but private student loans, which typically have variable interest rates, could see rates go up.

The logic behind such a rate increase is a bit circular. As banks that lend private student loans succumb to fears that borrowers might be increasingly unable to repay their debts — including from volatility in the stock market due to the credit downgrade, increasing tuition costs, decreasing federal and state financial aid budgets, and unemployment rates for college graduates — the banks might increase interest rates by 1 percent or 2 percent to help cover losses and expenses, which could result in even more borrowers who are unable to repay their loans.

Wile a 1 percent or 2 percent interest rate bump to private student loans may not seem like much, it’s likely to make a challenging situation even more difficult for the 14 percent of undergraduates who take out private student loans in order to cover the difference between federal student loans and grant-based financial aid and the rising cost of college. Even a small increase in interest rates could be “another nail in the coffin” and the final straw for some students, said Mark Kantrowitz, a higher education financing expert and publisher of financial aid websites FinAid.org and FastWeb.com.

Kantrowitz said that if the other two major credit rating services, Moody’s Investor Services and Fitch Ratings, follow Standard & Poor’s lead and downgrade U.S. credit, the rise to interest rates could be even more severe (“Lenders’ Fears Could Raise Interest on Student Loans,” The Washington Times, Aug. 11, 2011).

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