About two weeks ago, AAEA has written in its BLOG, short analyses on the student loans interest rate. Our analyses look at the economic philosophy why interest rate is necessary from the Classical Economic theory.  We also presented the rival’s of this theory from the monetarist point of views.  This analysis is an effort to understand, why the lawmakers is charging, in some loans, higher interest rate, than what the commercial banks do.  Only the lawmakers can answer this question for sure.  It seems that the public is the interest-rate takers–that means students have rarely ask, and they may not know about this whole thing until after receiving the first repayment bill from the loan servicing entities.

A necessary and sufficient conditions for any loan borrower to survive in its business plan iff (if and only if) the return on investment (ROI) is higher than the interest charges.  Otherwise, it surely will go bankrupt with the probability of one.  A quick question that student loan borrowers and their family should ask before pursuing any college major is to ask if she or he will get paid high enough that can cover the loan payment amount–if not, be realistic and scrap your plan.  These are the weaknesses that the Association has learned across the board, that the dreamers think they can get by.  May be they can in the past 30 to 40 years ago, but not in 2018.

The Financial Aids Office, the Student Advisors, the Student Success Office along with the loan providers have failed to convey this simple question or may be, they just do not  care.  The same situation with car salesmen–whose sole interest is to sell as many cars as possible–because that is their job. However a student financial aids advisor is not a car salesman.  They are in a better position, and are equipped with a better understanding and resources to better advise the loan borrowers than the car salesmen.

By charging the same interest rate among the student borrowers regardless of their majors is an evidence of over simplifying the student loans issue which has been happening for along time, without anyone critically thinks about it.  As results, the loan problems are getting worse every day as shown in Figure 3).  Increasing students’ default rate is a real example which shows that the ROI from investing in a college degree, for most part, definitely is lower than the interest charges (5-7.78% APR, depending on the type of loans).  So, America may witness another potential big event happens in the history of the country.