The long-term costs of a student loan

07/26/2013 3:01 PM

07/30/2013 6:50 PM

For generations, there has been a tried and true way for parents to help their children get ahead: investing in their education.

Along the way, we learned that the same formula works for society as well. Make public investments in education — be it through strong state university systems, tuition subsidies such as those provided by the G.I. Bill, or guaranteed student loans — and society will reap the benefits of a better educated and more productive workforce. America’s incredible economic dynamism since World War II would hardly have been possible without this basic policy orientation.

So why don’t bullheaded members of Congress seem to understand this? For months they have faced the responsibility of setting a new formula for interest rates on federally guaranteed student loans, and have failed to act. As a result, on July 1, rates on subsidized Stafford loans doubled to 6.8 percent.

Those loans are only available to students with need — that is, to students whose families cannot contribute the full cost of college — and they account for a quarter of all federal student loans. Suffice it to say that if that rate is left standing, a lot of students of humble means will face extra burdens to pay back the loans.

Congress has failed to act because each party caucus in each house has had a different idea of how to set interest rates going forward. The GOP in both houses has supported jacking up rates significantly, tying them to the 10-year Treasury rate with 2.5 to 4.5 percentage points added on, although House and Senate Republicans have differed on whether to make rates variable and whether to cap them. Democrats have supported fixing and capping student loan rates, as well as tying them to the much lower three-month Treasury rate.

Now, a bipartisan compromise, the Student Loan Certainty Act, has passed through the Senate, tying new rates to the 10-year Treasury note, plus 2.05 percent. It has a decent chance of passing the House. Democrats were able to push through caps at 8.25 percent for undergraduates, 9.5 percent for graduate students, and 10.5 percent for PLUS loans for parents who borrow to pay for their children’s college.

Some estimate that the plan will keep rates near to where they were at the end of last semester, and that should hold through 2015. However, the plan is a Band-Aid fix to a gash that needs surgery. By tying the interest rates on the loans to the bond market, Congress will insure that the rates will rise significantly in coming years, making defaults more likely and chasing students away from enrolling altogether.

Sen. Elizabeth Warren of Massachusetts was among the harshest critics of the compromise bill. She called it “obscene,” noting that the Congressional Budget Office found the bill would generate $184 billion in profit for the government during the next 10 years.

Warren also pointedly asked why it is OK for the government to charge students struggling to pay for their higher education a higher rate than what the Federal Reserve gives to big banks for access to federal funds.

We know the answer. One group has political clout, the muscle to push its preferred policies through Congress. Students, on the other hand, are gnats by comparison — even though one-third of all college students rely on federal loans.

The people most likely to be harmed by rising rates are lower-middle and low-income families. The difficulty of joining the middle class is no joke. A study of 2002 data from the U.S. Department of Education's ongoing Education Longitudinal Survey found that high-achieving low-income students were five times more likely than high-achieving wealthy students to skip college in the first two years after high school. Tying their path of upward mobility to the vagaries of the bond market risks undercutting these families further.

Last year, Bloomberg reported that college costs during the last 30 years have risen four times faster than the rate of the consumer price index, far outpacing inflation of consumer goods, medical expenses and food.

Many factors are involved in the escalating costs of a college degree, some the fault of the academy itself and others, such as slashed government subsidy, the consequence of hard economic times and poor policy choices. And, yet, students continue to borrow to attend, hoping the investment works out.

Student loan debt is now a whopping $1 trillion. Many young adults are finding they can’t afford to repay because they can’t find a job in their field of study, or any job for which a degree is even necessary.

That’s a problem.

Higher education policy in this country ought to be simple. It needs to be cheap, widely available and genuinely useful for getting people ahead and promoting economic growth.

Our university system is showing signs of an incipient crisis. Congress seems barely to have noticed.

Videos

Join the Discussion

The Kansas City Star is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Terms of Service