Student loans, also often called student debts, are financial aids in a loan form that requires borrowers to repay in the future (Wikipedia). Usually, student loans mean to provide students with financial issues the opportunity to obtain a college degree, which leads to an average lifetime income increase of $1.13 million for men and $792,000 for women (University of Kansas 1). As student loan aims at helping people live a better life, many college students exhibit negative attitudes towards interest rate of student debt, which is considered being too high, and debt issuers and the market are believed as the cause of high interest rate. Is it really true that student loans are tools of capitalists to rip off every penny from students? What factors exactly determine the rate of student loan? In …show more content…
Because college students usually have inadequate credit history and lower financial income, they are considered to have greater default risk than mortgage loan purchasers, who are usually adults with stable salaries. In order to compensate default risk, loan issuers add a risk premium into the basic interest rate, and it results in a higher rate for student borrowers. In addition to financial capability, another reason why student loans have higher rate is that they are not secured by any assets. House mortgages and car loans are backed by physical assets that can be sold to recover lender’s loss when the borrower is in default; even if the price of property falls during loan’s outstanding period, the lender will still be able to neutralize a great portion of financial loss. However, once lenders find out student loans are defaulting, there is very little they can do due to the lack of property backup, and charging a higher rate is just one way to earn the money back from interest