NEW YORK—General wisdom goes like this: keep student loan interest rates low so young people don’t accrue too much debt on the path to higher education. It makes sense. However, in reality, the relationship between low interest rates and student debt may not pan out exactly as expected.
Interest rates on student loans were recently extended by the government at the low rate of 3.4 percent—until July 2013 at least. Despite this, student debt still remains at an all-time high. The average student loan debt in New York rose slightly to $867 billion in the fourth quarter of 2011, according to the Federal Reserve Bank of New York.
The reason for the debt increase despite interest rate relief, some experts are saying, is that low interest rates may contribute to higher tuition rates, and a greater willingness to take out loans.
“There’s so much money available, so students are spending more money on education,” said Rick Newman, the author of “Rebounders: How Winners Pivot From Setback To Success.” “Some economists say that is exactly what makes prices go up.”
If more students are reluctant to take out loans, settling on associate or three year degrees, “it would change the supply and demand equation. If there was a little bit less demand for university slots, they would have to lower tuition to attract more people,” Newman said.
In the past, taking out large loans was not as problematic, because jobs were widely available after college. In the current sparse job market, however, “you can’t blindly spend it on whatever school will take you,” Newman said.
Newman said he would never suggest that people not go to college because it’s too expensive. “The most important thing is to get the right education and treat it as an investment,” he said.
Investing
For many, investing in an education is still the way to go despite the debt.
Victor Lopez is majoring in Greek and Roman studies. He will graduate from New York University this summer, with around $30,000 of debt.
“I thought I was going to become a doctor; I wasn’t really worried about the loans [at first],” he said. Lopez, however, realized later he was more interested in the humanities.
“I had to weigh whether I wanted to do something I really enjoy doing, or do something that will get me a job after I graduate,” he said.
Lopez decided to pursue his study of the classics, despite disapproving parents.
In the fall, he is starting grad school at the University of Pennsylvania. If student loan interest rates rise during grad school he will be affected.
“I don’t think there’s very much I can do. It will already be lower than any other loans I can get, compared to private loans,” Lopez said.
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