The Unpleasant Truth about the Effect of Losing the Interest Subsidy on Student Borrowers
Subsidized loans have historically been available to students with demonstrated financial need. Subsidized loans help students manage the cost of education, because in the case of subsidized loans, the government pays the interest that accrues on the loan while the student is in school.
When students borrow unsubsidized loans, interest will begin to accrue immediately, and any unpaid interest will be capitalized, or added to the principal of the loan. Capitalization is bad, assuming you don’t want to pay interest on interest. Capitalization gets expensive,and gets more and more expensive the longer it takes the student borrower to repay his or her loans.
Subsidy is Going, Going, Gone
The Budget Control Act of 2011eliminated the availability of subsidized loans for graduate and professional students beginning July 1, 2012. Subsidized loans issued before that date will remain subsidized; but beginning July 1, 2012, graduate and professional students will borrow only unsubsidized loans.
Graduate and Professional School Just Got (Even) More Expensive
How does the loss of the subsidy affect real student borrowers? Well, that depends.
Graduate and professional student borrowers shoulder significant debt burdens, and in order to afford their monthly payments, many must spread their repayment over time. The total cost of the loss of the subsidy will be higher for those borrowers who need to repay their loans over an extended period of time.
Take the example of a law student:
- About 75% of law students currently receive subsidized student loans to help pay for their legal education.
- Individual law students currently have access to as much as $8,500 in subsidized student loans.
- Because the subsidy is eliminated beginning July 1, 2012, law graduates of the Class of 2012 will be the last class with full access to subsidized loans, assuming a three year course of study.
- Law graduates of the Class of 2015 and beyond will have no access to subsidized loans during their legal education, again assuming a three year course of study.
I’m no exception to the “lawyers don’t do math” rule. But the team at GL Advisor isn’t afraid to do math, and they pitched in to analyze the effect of the loss of the subsidy on law student borrowers.
Bottom line? When the subsidy is fully eliminated, a typical law degree will cost about $7500 more than it does now. Ouch.
(Assumptions: Stafford loan borrowing of $20,500 per year, total of $61,500 over three years; Direct Loan Grad PLUS borrowing of $15,000 per year, total of $45,000 over three years; 3 years of loan disbursements, twice each academic year on 9/1 and 1/1; Graduation on 5/31; Full grace period utilized; Interest capitalization at end of grace period.)
|
|
Repayment term |
Total Paid by Student Borrower |
Total Increased Cost to Student Borrower |
|
Class of 2012 |
10-years |
$157,940 |
none |
|
25-years |
$258,980 |
none |
|
|
Class of 2013 |
10-years |
$168,805 |
$865 |
|
25-years |
$260,284 |
$1304 |
|
|
Class of 2014 |
10-years |
$170,468 |
$2528 |
|
25-years |
$262,791 |
$3811 |
|
|
Class of 2015 |
10-years |
$172,929 |
$4989 |
|
25-years |
$266,502 |
$7522 |
