After having dealt with at least one big part of the so-called "fiscal cliff" -- the broad tax increases that would have taken effect this year -- and having failed to stop another -- the sequester -- the government now faces yet another economic cliff event, this time affecting student-loan borrowers.
Without government action, rates on subsidized student loans will double as of July 1, putting further pressure on students who already face the uncertain prospects of whether they'll be able to get jobs to pay off their loans after they graduate.
Why Student-Loan Debt Is a Big Problem
Student-loan debt has become an increasingly troublesome financial burden not just on recent graduates but on the entire U.S. economy.
Student-loan balances outstanding passed up other popular types of debt such as auto loans and credit-card debt back in 2010, with the Federal Reserve Bank of New York reporting that total student loan debt was just shy of the $1 trillion mark as of the first quarter of 2013.
Even worse, while overall indebtedness in most areas, including home mortgages, has declined in the years since the financial crisis, student-loan debt has steadily risen, now standing 50 percent above its levels from just four years ago, according to the New York Fed.
Before you panic about your existing loan balances, though, it's important to understand that the debate over the future of student-loan interest rates doesn't affect loans made before the July 1 deadline. For those loans, whatever interest rates were in place when you got your loan -- such as the 3.4 percent rate that applied to loans for the 2012-2013 school year -- won't change.
Déjà Vu All Over Again
If this debate sounds familiar, it's because students went through the same crisis last year. In the end, the government simply agreed to extend the 3.4 percent rate for a year and put off making a bigger policy decision until now.
Various lawmakers and President Obama have come up with a wide range of competing proposals.
The president's proposal would reduce rates on both subsidized and unsubsidized loans, with roughly 3 percent rates for subsidized and 5 percent for unsubsidized loans being linked in future years to the yield on 10-year Treasuries, with a markup of 0.93 percentage points for subsidized and 2.93 percentage points for unsubsidized loans. The link to Treasuries means that rates could rise for students taking future loans, although each loan would be locked in with rates as of the year it was taken.
A competing GOP proposal from the House of Representatives would also base rates on Treasuries, with a 2.5-percentage-point markup on Treasury yields equating to a rate of roughly 4.5 percent based on current yields. Moreover, under the House's plan, the interest rate on student's loans wouldn't be set until after they graduate, introducing new uncertainty to the borrowing process.
Competing Senate plans take similar tacks but have different effects. Senate Republicans would use a 3-percentage-point markup versus Treasuries, while Senate Democrats would like to tie loan rates to the lower 3-month Treasury rate. In addition, various individual lawmakers have proposed temporary fixes, including Sen. Elizabeth Warren's (D-Mass.) proposal to set the 2013-2014 rate at 0.75 percent.
Planning for the Future
At this point, students have limited options to try to protect themselves against a potential rate hike.
Unlike homeowners, who have rushed to refinance their mortgages in recent years to take advantage of low rates, there's no viable way to accelerate borrowing on student loans without resorting to private loans, which already carry much higher interest rates than even the most draconian of the Washington proposals covering federal student loans.
The better solution is to focus on what you can control -- because while interest rates are out of your hands, there are a host of things you can do to reduce the cost of college.
Taking steps to reduce expenses beyond required tuition and fees can go a long way toward cutting your eventual financial-aid bill. By acting now to explore alternatives like cheaper room-and-board or other housing options, you might be better able to make ends meet. And
The most important lesson that the current controversy underscores is the need for parents to do everything they can to avoid having to rely on government loans in the first place. Boosting your own college savings -- whether through a 529 plan or one of the alternatives -- will leave you less dependent on the ever-changing political landscape in Washington, as well as leaving your children far better prepared to enter adulthood on a sound financial footing after they graduate.
Delayed Launch: How (and Why) to Delay Your Entry into the Job Market
Student Loan Interest Rate Is Set to Double: How You Can Prepare
The classic method for avoiding the job market, graduate school has the added benefit of -- under the right circumstances -- making you look even more attractive to employers and recruiters. On the other hand, a poorly-chosen degree can also leave you with even more debt and no improvement in your job prospects.
If you qualify for a fellowship, assistantship, or scholarship that will cover your tuition costs and give you a stipend, going for an advanced degree becomes a no-brainer. While grad stipends are far from princely, with careful planning, you may be able to get out of grad school with no increase in debt, a degree that will likely improve your employability, and a shot at job-hunting in a friendlier environment. That being said, it especially helps if your degree is in a high-paying field. Georgetown University's Center on Education and the Workforce offers some useful information on choosing the advanced degrees with the best returns on investment.
There's an old saying: If you have to pay for grad school, you probably shouldn't be there. In other words, if you can't get an assistantship or fellowship, you might want to reconsider your postgraduate education. For that matter, if you're carrying a lot of private student loan debt, you might want to hold off even for a program with a stipend: Those loans, unlike the government-backed variety, won't be deferred while you're in grad school, so if you take one of those not-so-generous stipends, keeping up with your payments will likely be difficult.
Another classic method for postponing the day you have to get a "real" job, the Peace Corps gives young people the opportunity to travel the world, see exciting things, and make new friends. And, when you get back, you'll have the added benefit of foreign language skills and a great line on your résumé.
If you're interested in seeing the world, aren't averse to living surrounded by extreme poverty, and aren't carrying much private loan debt, the Peace Corps can be a great choice. During your time in the corps, your federal student loans -- and some private loans -- will be deferred, and your Perkins loans may even be partially forgiven. And, when you get back home, you'll have a readjustment allowance to help you get back into the swing of things.
The Peace Corps doesn't pay much, which can make your financial life difficult if you're carrying a lot of private loan debt. For that matter, the Corps has recently had problems with ensuring the safety of its volunteers, which could be a serious problem, depending on where you're posted. Beyond that, if you aren't sure you'll be able to adapt to living in rougher circumstances, surrounded by extreme poverty, you may want to think twice about signing up.
If you're looking for a way to enter into the teaching profession, or if you just want to try out being in front of a classroom for a few years, consider Teach for America. The program places college graduates into low-income classrooms across the country, offering them a salary, loan forbearance, money for education, and -- when they leave -- up to $6,000 in loans and grants to help them get reintegrated into society.
If you're interested in teaching, are enthused about the idea of working with low-income students, and don't have a lot of outstanding private loans, Teach for America can be a great bet. It looks good on a résumé, and is an excellent way to get started in teaching.
This is going to start to sound repetitious, but it keeps applying: if you're carrying a lot of private loan debt, Teach for America may not be for you. Even if you can get a deferment on your loan, you'll still be accumulating interest, which will leave you further in the red. Beyond that, if you are uncomfortable living and working in lower-income areas, this program is definitely not for you.
Interested in joining the Peace Corps, but don't want to get vaccinated for yellow fever? If so, AmeriCorps might be the choice for you. Working in education, public safety, environmental protection and health care, it places volunteers with dozens of different programs. Depending on your placement, AmeriCorps service could land you in a classroom or the field, building houses or working with FEMA. Benefits also vary greatly, depending on the program, but can include a living allowance, childcare stipends, an education benefit, and some health care.
AmeriCorps members may qualify for up to $5,550 in education assistance, which can be used to pay off existing loans or to fund further schooling. Additionally, the childcare allowance can make it more attractive to people with children. And, as an added benefit, your volunteer work could help you pick up some marketable skills.
AmeriCorps' education assistance is not as impressive as the benefits offered by other programs, which may make it less attractive if you're carrying a heavy student loan burden. Also, because the work placements vary so widely, there's a good chance that your skills may not be all that marketable.