NEW YORK (MainStreet) If you're in the market for higher education but can't afford the hefty price tag out-of-pocket get ready to pay a tax on your ambition. The interest rates paid on federal student loans (especially at the graduate level) exceed those for other notes, effectively placing a tax on the most ambitious. A recent study by the New York Fed sheds light on the growing burden: Student loan borrowers are for the first time less likely to obtain mortgages or auto loans. That's capital being diverted from ostensibly more economically productive activities to debt repayment.
If some economists argue austerity policies (such as higher taxes) are partly to blame for anemic economic recoveries, then the burden of student loans can be seen as a form of "private austerity," depressing borrowers' ability to save and consume. Student loan expert Heather Jarvis explains that this phenomenon's impact extends beyond the borrowers,
"Higher student loan burdens are limiting people's ability to participate fully in the economy, and this will have long-term, downstream consequences," she said. "They not only can't afford mortgages, but they also can't afford to invest or save for their own children's education. It creates a vicious cycle that impacts upward mobility."
Market-Sensitive Interest Rates?
For years, higher education was seen as a means for accelerating that mobility, and programs such as the G.I. Bill, federal grants and subsidized student loans put that dream within the reach of many. But even as the recession gained steam, most tuition bills kept growing, making college less affordable for struggling lower and middle class families.
Some federal loans (such as Grad Plus loans) bear fixed rates as high as 8.5%. With other borrowing costs at historically low levels, Jarvis thinks fixed student loan interest rates may be part of the problem,