The interest rate for undergraduate students taking out federal loans will decrease from 4.29 percent to 3.76 percent in July. Interest rates will also decrease for parents and graduate students, the Treasury announced today.
While the change will undoubtedly decrease payments for future borrowers, it’s unclear whether the decrease in rates will meaningfully decrease student loan defaults. That’s because students who borrow for college but never graduate are three times more likely to default. For most graduates who borrow, repayment of loans is not a significant challenge. The Department of Education acknowledges this problem:
For too long, though, America’s higher education system has focused almost exclusively on inputs – money for enrolling students – and too little on outcomes – what students get out of college. We must shift focus toward creating an accountability and incentive structure that provides educational opportunity by ensuring that students are graduating on time with an affordable, meaningful degree or credential. Otherwise, we will merely be finding better ways of paying for an unsustainable status quo.
Parents and students will undoubtedly welcome the news that their student loan payments will be lower. But tweaking interest rates does little to address higher education’s underlying problems.