Big College Soaks Taxpayers

, Roger Aronoff, Leave a comment

Rates on new subsidized federal student loans just doubled from 3.4% to 6.8% on July 1st, a fact that was met with dread, frustration, and, for some, celebration. As Danielle Kurtzleben notes for U.S. News and World Report, a student loan rate of 6.8 percent “wasn’t always so scary,” that is, until Congress lowered it to 3.4%.

“The increase was long foreseen,” reported InsideHigherEd. “Congress passed legislation in 2007 that gradually lowered the interest rate from 6.8 percent to 3.4 percent over five years, but the rate was scheduled to rebound in 2012.”

“But as concern grew about student debt during last year’s presidential campaign, student groups and the Obama campaign successfully persuaded Congress to pass a one-year extension of the 3.4 percent interest rate, a historic low, at a cost of $6 billion.”

Clearly, extending this historically low rate was politically and financially untenable; but if you read the mainstream media, a Congressional “impasse” is what’s to blame for the current rate. That is coded language which means it’s the fault of those evil Republicans who refuse to pass anything meaningful. “The rise in interest rates came because Congress failed to reach a compromise last week for the student-loan program,” reported the Christian Science Monitor.

“Republicans have taken advantage of the gap between the Obama administration and congressional Democrats,” asserted The Hill. “Since the House passed its proposal, Republican leadership has engaged in some of the same campaign-style tactics used in the past by Obama to criticize Democrats’ inability to advance their own plan,” reported the Los Angeles Times.

President Obama proposed a fix in his 2014 budget which, according to InsideHigherEd, “would peg the interest rate on student loans to the yield on 10-year Treasury bonds, with lower rates for subsidized loans (the 10-year Treasury yield plus 0.93 percentage points) and higher rates for unsubsidized and PLUS loans.” The Republican House plan, in contrast, “would allow student lending rates to reset each year, based on the interest rate of a 10-year Treasury note, plus 2.5 percentage points for Stafford loans,” according to The New York Times.

“The Congressional Budget Office projected that rates on Stafford loans would rise to 5 percent in 2014 and 7.7 percent in 2023.”

“Under the legislation, Stafford loans would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent cap,” reports the Post, and the House plan would reduce the deficit by $3.7 billion over 10 years. This, the White House has announced, it would veto.

According to The Hill, this lack of a compromise has led to “a fresh round of the blame game,” with Republicans and Democrats attacking each other. “Today, student loan rates will increase simply because Senate Democrats failed to act,” said House Majority Leader Eric Cantor (R-Va.), according to the Hill.

“There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families, instead of closing tax loopholes for the wealthiest Americans and big corporations,” Adam Jentleson, a spokesman for Senate Majority Leader Senator Harry Reid, told Fox News last week. Jentleson blamed Republicans: “Senate Democrats continue to work in good faith to reach a compromise but Republicans refuse to give on this critical point.”

“In fact, Senate Republicans introduced a proposal that Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell, described as identical to the president’s—and it didn’t pass,” notes Betsy Woodruff for National Review. “So Republicans don’t see it as much of a stretch to characterize Senate Democrats as obstructionists.”

But regardless of whose doorstep the student loan hike should be laid at, the fact remains that student loan debt is overburdening American youth, discouraging them from owning a home, buying a car, or getting married. According to USA Today, “Based on more than 28,000 comments submitted by consumers and industry leaders, the report found that debt held by millions of Millennials may be forcing this generation to” do such things as “Put off home ownership,” “Divert money from retirement accounts,” “Impede the ability to take small-business loans,” and even “Forgo securing car loans.”

“According to an extensive 2012 analysis by the Associated Press of college graduates 25 and younger, 50% are either unemployed or in jobs that don’t require a college degree,” writes Glenn H. Reynolds for the Wall Street Journal. “Then there are the large numbers who don’t graduate at all.” Those who don’t graduate still shoulder large amounts of debt.

“The skyrocketing cost of a college education is a classic unintended consequence of government intervention,” writes Reynolds, author of The Higher Education Bubble. “Colleges have responded to the availability of easy federal money by doing what subsidized industries generally do: Raising prices to capture the subsidy.”

So raising interest rates on new student loans might actually have a beneficial impact by persuading some students to choose a cheaper college, or, if they are on the margins, not to attend—or at least not to take out so much debt. That’s the conclusion that the Cato Institute’s Neal McCluskey came to in his article, “6.8 Day Is Here!

“Hooray?” he asks. “Perhaps the rates rising will dissuade some people from going to college who should be doing something else, or some people going to college who should be there from choosing a more expensive school that offers no better academics but lots of superfluous frills.”

“That said, the uptick in rates is likely to have little major effect on what people are willing to pay,” he writes. “And to some extent that is as it should be.”

Maybe it should be otherwise. Whereas people complain about Big Oil or Big Business you don’t hear much about “Big College,” yet college tuition rates continue to rise at an exorbitant rate. University bureaucracies are bloated, and professors are pampered. It’s time that people take another look at how much their college is costing them—and how little they’re getting in return—not just worry about the interest rate that they’re paying on their loans.