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A Student Regards the Senate Student Loan Agreement

by sharon koss / /

As a student currently applying for loans to attend my final year of college, I ask Congress to please help today’s students by not helping. On July 1, 2013, the 3.4 percent federal student loan interest rate expired and the rate returned to 6.8 percent. The Senate is now taking up the Smarter Solutions for Students Act, passed by the House, that would tie federal loans to the 10-year Treasury note borrowing rate plus varying rates based on the type of loan with interest rate caps starting at 8.5 percent. A bipartisan substitute amendment tweaks the House language to postpone the immediate rate hike, allow students to lock in interest rates, and even manages to find some meager savings. While this compromise does allow the free market to place a heavier influence on interest rates, it does not completely remove the government from the student loan process..

Over time, achieving a bachelor’s degree has become conflated with the “American Dream,” propped up by politicians who advocate for making college cheaper through subsidizing and capping loans. However, the Heritage Foundation points out that the government is not pulling from its own stash of money but is requiring that taxpayers pay $6 billion each year, the current annual cost of the loan policies over the past six years, saving students on average only $7 per month. The money comes from taxpayers to fund the 30 percent of Americans who go to college. That means that the 70 percent of Americans who work blue collar jobs at construction sites, grocery stores, or power plants pay for the selected few.

Rather than making college more affordable, a Cato study shows that increasing federal aid has made college more expensive. While federal aid tripled, the average cost for public and private schools went up 42 and 31 percent respectively. Artificially distorting the real cost of a college degree is also resulting in many high school students deciding to take out loans to pursue degrees that have very limited market value upon graduation. Greater numbers of people entering the workforce out of college means higher competition for post-graduate jobs. Degree holders must compete for lower paying jobs or end up taking jobs which may not have required a degree – and the “reward” is to be saddled with overwhelming debt. Put simply, more graduates devalue the importance of a college education.

What people should be worried about is the graduation rate, which is distressingly low. Only 54 percent of those who enter four-year colleges complete their education within six years. These low graduation rates can be partially attributed to a distorted understanding of the risks involved with college. To many, it is viewed as a rite of passage rather than a serious educational endeavor requiring a copious amount of studying and hard work. NTU’s Nan Swift earlier remarked:

Taxpayer-funded subsidies that keep student loan rates artificially low have had the extremely negative impact of both inflating the cost of college degrees and opening the floodgates to a host of students with a higher risk of default or who are ill-prepared for the academic rigors of higher education. These students would have avoided taking on the enormous debt increasingly associated with a college degree where it not for the abundance of cheap credit at taxpayer expense.

The amended Smarter Solutions for Students Act is a compromise which many Members of both parties in the Senate, House Republicans, and the administration all agree on.  The Brookings Institution even acknowledges that:

When you let Congress set the rate and then the market moves around that rate, the market rate and the student loan rate set by Congress get completely out of whack…So tying it to the market rate fixes that problem.

Still, the legislation has considerable drawbacks. According to the Congressional Budget Office (CBO), this bill is projected to reduce the deficit by a net amount of $715 million over a ten-year period. Setting aside the controversy among primarily left-of-center commentators over whether government should “profit” from the student loan business, it’s important to read what’s behind CBO’s topline estimate. For one, offsetting savings don’t begin to occur until 2017; spend now, save later is a familiar feature of many proposals in Washington. Furthermore, CBO’s numbers don’t use “fair value” scoring assumptions, which better account for market risk in credit programs. Thus, deficit-neutrality may turn out to be an illusion.

In the end, therefore, passing this piece of legislation represents only a modest step in the right direction for taxpayers’ wallets, for the national deficit, and for reducing artificial control over interest rates. As the compromise bill is voted on in the Senate today, Congress and the administration have a chance to allow prices to rise and fall more closely with market conditions. As bipartisan support for student loan reform grows, perhaps one day we’ll be able to get Washington out of this business entirely.