Colleges are biggest beneficiary of low student loan rates

The political crisis dujour is U.S. student loan debt which, at more than $1 trillion, is now greater than American credit card debt, according to the Consumer Financial Protection Bureau.

This is the latest of the hardy fiscal perennials we have been dealing with since the 2008 financial crisis. These matters are like food and drink to politicians, the media and the special interests that can be counted on to describe the issue as anywhere from alarming to frightening.

We are told that student loan debt is the next calamity, comparable to the mortgages that created the disastrous housing bubble. Those in the know are “gravely concerned” about this latest “threat to our economic future.” Needless to say, our leaders must “act swiftly and decisively” to stem the tide.

The issue is front and center in Washington, D.C., because the Senate failed to agree on a plan to keep the current federal student loan interest rate of 3.4 percent from doubling to 6.8 percent on July 1. More than seven million loans could be affected by the hike. Both President Barack Obama and former Massachusetts Gov. Mitt Romney support keeping the interest rate at 3.4 percent. The change is estimated to cost the average loan holder between $7 and $25 a month.

In 2007, while we were swimming in a sea of red ink, the folks in Washington- including then-President Bush- cut the statutory 6.8 percent interest rate in half on these federal loans. This provision was to expire in five years. Time is up July 1.

A largely unasked root question is what does keeping federal student loan interest rates do? Does it lead to more student borrowing? What about its impact on costs? Since the 1980s, the cost of college has increased by more than 400 percent while the median income has only increased by 150 percent. Continuing to make federal funds freely available to students makes it easier for colleges and universities to raise their prices year in and year out.

Colleges and universities are arguably the biggest beneficiaries of student loans. In addition to making it easier for them to raise prices, they also increase revenues with no credit risk. Meanwhile, many students graduate with a toxic combination of mountains of debt and dismal job prospects.

Loan default rates are even more dismal. Nearly three of 10 student loans have past-due balances of 30 days or more.

The Senate voted twice last Thursday to keep the student interest rates low, but got nowhere. They rejected competing Democratic and Republican plans to stop rates from doubling because of – you guessed it- partisan bickering over how to pay for it. The “world’s greatest deliberative body” argues about how to pay for $6 billion in annual costs even as it is borrowing $1 trillion this year.

Is this another example of temporary largesse becoming a permanent entitlement, thanks to election-year pandering to a special voting bloc? Do we really need more of this bush league stuff when we should be raising taxes and cutting spending to deal with a $1 trillion deficit and nearly $16 trillion in public debt? The faintly good news is that given the political incentives in this general election year, senators will likely arrive at an 11th-hour bipartisan compromise to increase the federal student loan interest rate subsidies. Both parties will then do an elaborate and extended touchdown dance.

Thank goodness the Senate doesn’t have the pandering equivalent of the NFL’s penalty for excessive celebration. If they did, there might not be any senators left.

originally published: May 31, 2012

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