College loans remain a cruel charade. In the name of making higher education “more affordable,” students are conned into borrowing far more than they can repay in return for a university degree. If they accept trendy course offerings more in tune with political correctness than the needs of the marketplace, they’ll learn that even bankruptcy won’t discharge this debt that can run into six figures. The House last week passed a bill that tries to restore sanity.
Government meddling has turned a college diploma into an expensive credential of increasingly dubious value. Taxpayers have been backing loans for students for decades, but Democrats think “making college more affordable” by boosting the subsidy is a winning message. So in 2007, Congress gradually reduced the interest rate on subsidized Stafford loans from 6.8 percent to 3.4 percent. The interest rate was meant to return to 6.8 percent in 2011, but in its usual fashion, Congress keeps voting temporary extensions. This gives the politicians an opportunity to play the hero by “saving” students from the doubled rate. Another vote must be taken within a few weeks’ time, or the interest rate will return to 6.8 percent.
But that’s unless the Senate agrees to the House bill, which ties the rates to the 10-year Treasury rate (which is the rate at which the government borrows), plus 2.5 percent. The rate would vary while the student attends classes, but would be capped at 8.5 percent, and the borrower would have the option of consolidating all loans at a fixed rate upon graduation. This would come to about 4.4 percent right now.
President Obama prefers the status quo and is willing to use his veto to maintain it. He and congressional Democrats insist that adopting fluctuating market rates introduces “uncertainty.” They prefer taxpayers keep funding loans at the below-market 3.4 percent rate. This would hardly ensure certainty, because it ties the needs of students to the whims of a cash-strapped Congress.
The current situation is unsustainable, with lending risks falling entirely on the students and taxpayers. The rewards go to the universities, which have raised tuition to maximize their share of the flood of cheap money. University of Tennessee law professor Glenn Reynolds estimates that college tuition grew at more than double the inflation rate between 1980 and 2010. In fact, college costs rose more steeply than the price of health care.
University administrators saw no need to curb their appetite to raise tuition rates because no matter how high the cost of entry to college, it was always covered by cheap loans, subsidized by the taxpayers. Federal student aid increased by 372 percent between 1985 and 2010, from just under $30 billion to almost $140 billion, according to the Cato Institute’s Neal McCluskey. This is how Uncle Sam has been inflating the higher-education bubble.
Families should be able to weigh the true costs and benefits of college. This can’t be done while Congress continues to “help” students by subsidizing a debt that has reached $1 trillion. The Senate should take up the House bill, which represents a modest first step in deflating the bubble.
The Washington Times