On Monday, some student loan rates doubled. That’s disappointing, not just for students who will have more to pay back, but also for taxpayers — who shouldn’t be holding all those notes to begin with.
“The interest rate on a key federal student loan doubled Monday, as expected, but it is unclear whether Congress will allow the increase to stand before the new school year gets under way,” the Washington Post reported. “Federal law has set the rate for new subsidized Stafford loans at 6.8 percent, up from 3.4 percent. The subsidy means that these loans, for undergraduates with demonstrated financial need, do not accrue interest while the students are in school. It is estimated that the rate hike would add about $1,000 in interest over the life of a loan for many borrowers.”
The problem here isn’t just the extra interest. Interest rates on any kind of loan should reflect what’s going on in the free markets — otherwise, it’s not a loan; it’s a gift.
“If you are going to have federal student loans, it makes sense to peg them to interest rates such as those of the 10-year Treasury Bond rather than having Congress fix a number for several years,” explains the Cato Institute’s Neal McCluskey. “At least then they will fluctuate with the overall time value of money.”
Federal loans have fueled years and years of price inflation in our nation’s colleges and universities, precisely because normal market forces are quashed. A third party stands between the consumer of education (the student) and the supplier of education (the college).
That’s pretty much what most colleges and universities, and many students, want.
“They want super-cheap — preferably free — loans, which makes sense (for them),” says McCluskey. “Like normal people, they want money at as little cost to themselves as possible. Unfortunately, but not surprisingly, that is what many vote-seeking politicians want to give them, despite the powerful evidence that aid mainly lets colleges raise their prices at breakneck speeds, fuels demand for frills, and abets serious non-completion.”
That being said, a college education is still usually a good investment, even at the higher interest rate.
“The average college graduate will earn enough additional money as a result of having a degree that the additional debt is worth taking on,” McCluskey notes. “However, roughly half of people who enter college won’t complete their studies, and half of those will earn below the average for whatever piece of paper — some sort of certification or degree — they complete.”
And that puts the federal government in the awkward position of having to dun the un- and underemployed, or accepting high rates of defaults.
The whole mess begs the question, why is the federal government making these loans?
One answer could be the Congressional Budget Office’s estimate that the federal government stands to make $50 billion in profit from the program this year.
But is that the business we want the government to be in? No — no more than we want the government to profit from home loans or health care.
Let the markets handle student loans.