The United States hosts more than 23,000 payday lending stores, which outnumbers the combined total of McDonald’s, Burger King, Sears, J.C. Penney, and Target stores. These payday lenders do not make conventional loans as seen in most banks, but instead offer short-term loan amounts for short periods of time, usually until the borrower’s next paycheck, hence the name “payday loans.”
While some borrowers benefit from this otherwise unavailable source of short-term and small-amount credit, the payday lending business model fosters harmful serial borrowing and the allowable interest rates drain assets from financially pressured people. For example, in Minnesota the average payday loan size is approximately $380, and the total cost of borrowing this amount for two weeks computes to an appalling 273 percent annual percentage rate (APR). The Minnesota Commerce Department reveals that the typical payday loan borrower takes an average of 10 loans per year, and is in debt for 20 weeks or more at triple-digit APRs. As a result, for a $380 loan, that translates to $397.90 in charges, plus the amount of the principal, which is nearly $800 in total charges.
According to an aide connected to the Democratic Party, bipartisan senators reached a deal Wednesday that would offer undergraduate students a lower interest rate of 3.85 percent on student loans, up until the year 2015. Revealing this information to USA Today prior to the official vote, sources confirmed that both parties are working towards lowering students costs. USA Today reports:
The bipartisan agreement is likely to be the final in a string of efforts that have emerged from near constant work to undo a rate hike that took hold for subsidized Stafford loans on July 1. Rates for new subsidized Stafford loans doubled from 3.4% to 6.8%, adding roughly $2,600 to students' education costs.
Read more here.
Yesterday, as Congress battled over the future of interest rates on student loans, I was invited to the East Room of the White House to hear President Obama call on Congress to keep college affordable. Upon arrival, I found that most of the invitees were college students 20 years old and younger—at 36, I felt pretty old.
It was like being at a rally at on a college campus. What made it interesting was that Obama was directly speaking to those most affected by this pending Congressional action – college students.
College students who need to borrow for school, on average graduate with more than $25,000 in debt.
On July 1, the federal interest rate for student loans is scheduled to double from 3.4 percent to 6.8 percent unless Congress intervenes. The new rate would affect federally subsidized Stafford loans, which are provided to almost 7.5 million low- and moderate-income students nationwide each year.