Morning Bell: Washington Needs A Lesson on Student Loans

Mike Brownfield /

You know a politician is looking for applause when he speaks in front of a crowd of college students and says he’s there to help them pay back their student loans. After all, who doesn’t like the prospect of free money? But as the saying (sort of) goes, beware of politicians bearing gifts. That’s especially true this week as President Barack Obama travels the country warning students that their student loan interest rates are set to double and that he has the answer to all their problems.

Guess what? He doesn’t. But if there’s one thing the president has managed to accomplish, it’s in turning this issue into a political football. And now the House of Representatives is joining the game.

This all began back in 2007 when Democrats pushed for a five-year student loan interest rate reduction to 3.4 percent as a temporary subsidy in order to help make the loans more affordable. Now that “temporary” subsidy is set to expire, meaning that rates will return to their original 6.8 percent levels. In the midst of all this, the House is expected to vote today on a measure that would keep interest rates where they are — costing taxpayers $5.9 billion for a one-year extension. And under the proposal, the extension would be paid for by taking funds from Obamacare’s Prevention and Public Health Fund. Obamacare, instead, should be repealed outright — not used as a “slush fund” to pay for other programs.

But besides the measure being a flawed and costly way to pay for the lower interest rates, there’s an even bigger problem. The supposed benefits of keeping the interest rates at 3.4 percent are largely illusory, and the president is selling students a bag of magic beans. Economist Douglas Holtz-Eakin explains on National Review‘s “The Corner”:

[The interest rate increase] sounds serious. After all, there are 39 million Americans with student loans owing over a trillion dollars of debt, and interest rates doubling from 3.4 percent to 6.8 percent would be a huge hit at a time when households are already struggling.

Serious, except that the president’s plan would apply only to those 23 million loans being borrowed directly from the federal government. Except that not all of those would benefit; it would apply only to the 9.5 million loans being borrowed through the so-called subsidized Stafford loans. Except the lower rate would apply only to new borrowers who apply this year. Except that no payments are made until after graduation, so it would not help anyone for several years. Except that it would lower monthly payments by an average of only $7.

In other words, for an incredibly high cost, students are realizing very little benefit. And don’t forget, these are loans that they’re voluntarily taking on as part of an investment to benefit themselves.

None of this is to say that the federal government should spend even more to subsidize student loans in an effort to make college more affordable. It absolutely should not. Federally subsidized student loans are handed out to millions of college students regardless of risk — let alone whether they can handle college-level work. Thanks to taxpayer backing, the loans are offered at rates far below what private lenders would offer. When the students can’t afford to pay, the American people are stuck with the bill.

On top of all this, government intervention in the higher education marketplace hasn’t even succeeded in bringing down college costs. In fact, the price of a degree has risen right along with government spending. Pell grants have increased 475 percent since 1980, and yet the cost of attending college has increased 439 percent since 1982. It’s a vicious cycle that will only get worse with more government subsidies.

There’s a better way to drive down college costs. Heritage’s Stuart Butler writes that the higher education industry is on the verge of a “transformative re-alignment,” and notes:

…most college leaders live in a bubble in which the costs of ever more elaborate facilities, expanding administrative bureaucracies, and high-profile professors with light teaching loads can simply be passed on to customers in the form of higher tuition.

But those days are about to end. Underneath the surface, upstart institutions are perfecting radically new education technologies and business plans at the same time that young people and their parents are becoming more frustrated with the traditional higher-ed model, and more open-minded about alternatives. There is every reason to suspect that, quite soon, these new institutions will do to higher education what Sony did to radios and Apple did to computing. Afterward, our colleges and universities will never be the same. Few Americans, one suspects, will look back in regret.

Sure, it might strike all the right populist tones to tell college students that you’re going to give them a hand out, but the caustic effects of the policy will only make higher education more costly over time. Instead of a short-term spending splurge that has little benefit, Washington should pursue a long-term strategy that gives students the help they really need.

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