Lower College Loan Interest Rates Won't Fix the Student Debt Crisis

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Student loan debtOutstanding student loans having topped the $1 trillion mark, but it's down at the individual level where that debt burden has built up that former students are finding it difficult to bear. With jobs still hard to come by, young adults are looking for any break they can get.

Those with student loans finally got some good news over the weekend, as Congress extended a cut in the interest rate on federal Stafford loans and prevented the rate from returning to 6.8% from its current level of 3.4%. According to The Washington Post, the one-year extension of the lower rate should translate to savings of about $1,000 on a typical loan over its lifetime.

A Short-Sighted Quick Fix?

Undoubtedly, saving $1,000 or more on student loan interest would be a help to many struggling graduates. In fact, critics of the measure point out that it only extends low rates for a single year, which some argue raises uncertainty about borrowers' financial future -- even though the original rate reduction was intended from the start to be temporary. Extending the interest reduction permanently would obviously provide much more than $1,000 in savings for many students.

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Those savings, however, obscure the real source of the problem. And unfortunately, lower loan rates do nothing to address that cause.

Too often, when people buy things on credit, they focus only on their monthly payments rather than the actual total cost of what they're buying. Some experts believe that the lower monthly payments that result from low interest rates explain why college tuition has risen so far. Higher rates would change the supply-demand equation, making college less affordable and forcing schools to rein in tuition to keep their enrollment up.

Proponents of low student-loan rates argue that we should do everything we can to allow people to go to college. Yet similar government policies encouraging home ownership arguably led to the housing bubble, and when it burst, the net effect was to force many homeowners out of their homes.

7 PHOTOS
Private Colleges With the Lowest Student Graduating Debt
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Lower College Loan Interest Rates Won't Fix the Student Debt Crisis

Location: Princeton, N.J.

Undergraduate Enrollment: 5,220

Total Annual Cost: $50,269

Average Debt at Graduation: $5,225

Students Who Borrow: 23%

Princeton’s no-loan financial aid policy, introduced a decade ago, means that less than one-fourth of students need to borrow, and the amount they do borrow is small. Princeton’s average debt at graduation, at a little over $5,000, is the lowest among our top 200 private colleges.

Location: Berea, Ky. 

Undergraduate Enrollment: 1,613 

Total Annual Cost: $32,894 

Average Debt at Graduation: $5,836 

Students Who Borrow: 73% 

Plenty of colleges talk about keeping costs, and student debt, down, but Berea walks the walk: This Christian-focused institution covers the full $25,500 tuition for all students, out of a mix of grants and scholarships, leaving them to cover only $7,394 in remaining costs (including room and board). It’s no surprise that average debt here is second-lowest on our list.

Location: Williamstown, Mass. 

Undergraduate Enrollment: 2,029 

Total Annual Cost: $55,360 

Average Debt at Graduation: $8,369 

Students Who Borrow: 43% 

With an average financial-aid package of about $40,000 a year, Williams brings the annual cost of its elite education to a relatively modest $15,360 for students who qualify. Williams admits students without considering their financial circumstances and meets the full demonstrated need of students who enroll.

Location: New Haven, Conn. 

Undergraduate Enrollment: 5,294 

Total Annual Cost: $53,700 

Average Debt at Graduation: $9,254 

Students Who Borrow: 28% 

An Ivy League school with a walloping endowment and a financial-aid budget of $117 million, Yale offers no-loan financial aid to more than half its students, including families earning well over $100,000. Result: Students who borrow carry away one-third less debt than the national average for borrowers at private schools.

Location: Claremont, Cal. 

Undergraduate Enrollment: 956 

Total Annual Cost: $55,700 

Average Debt at Graduation: $9,435 

Students Who Borrow: 36% 

This tiny, all-women’s school awards generous need-based and merit-based grants as well as privately funded need-based loans, which do not accrue interest while the student is in school. (Students also have access to federally sponsored loans, such as Staffords.) Scripps is one of the three members of the Claremont Colleges (a consortium of five colleges and two graduate programs that share faculty and facilities) to make our top ten for low debt.

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The only way to solve the student debt crisis is for new college students to work hard to avoid that debt in the first place. By carefully weighing the relative advantages of a more expensive school compared to a less costly one, students can make smarter decisions about whether taking on more debt than absolutely necessary will really pay off in the long run. Until students start thinking that way about their education, though, they'll continue to struggle under mountains of debt after they graduate.

For more on smart borrowing moves: Fool contributor Dan Caplinger got out from under his student loans awhile ago. You can follow him on Twitter here.
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