May 29 2013

College Affordability Government Style

Vicki E. Alger

 

Last year Congress extended a 3.4 interest-rate freeze on student loans to help make college more affordable. (Spoiler alert: It didn’t. It cost taxpayers around $6 billion dollars to save college students $10 or less on their loans.). After decades of Congressional meddling, subsidizing private lenders (federal guaranteed lending), and then making the U.S. Department of Education the sole issuer of student loans (federal direct lending), college is no more affordable today. But since when has failure ever stopped the feds?

Apparently, if at first you don’t succeed, fail, fail again. Last week the House Education and Workforce Committee passed the Smarter Solutions for Students Act. The Committee press office hailed the bill as a “long-term solution to student loan interest rates.”  That’s because instead of Congress tinkering with interest rates each and every year, the Smarter Solutions bill links rates to 10-year Treasury notes. This is what passes for a market-based solution in D.C. these days?

The real issue is not weather Congress interferes once a year or once every decade. The issue is that the federal government is in the lending business in the first place. Not everyone’s happy about the bill, of course. Rep. George Miller (D-CA) does not like the fact that the rates could result in profits that would be redirected toward deficit reduction.

The reality is the U.S. Department of Education has been making an annual profit of about $50 billion off of student loans for the past several years. That’s more profit than Exxon Mobil or Apple generate, by the way. So much for all the rhetoric from Education Secretary Arne Duncan a few years ago about “working Americans pay while bankers get rich.” Today, working Americans still pay, but now it’s the feds who get rich. Meanwhile, college tuition continues to increase more than anything else each year as it has since 1958 when the feds first got into student lending. The Cato Institute’s Neal McCluskey gives an apt analogy concerning the Smarter Solutions bill:

Basically, this change is like banging out a single dent in a car that’s careened off a cliff, rolled over twenty times, and caught fire. It seems reasonable that if Washington is going to provide student loans, interest rates should be pegged to broader rates. … Of course, the root problem is that Congress furnishes student loans at all, killing the natural discipline that comes from people paying for something with their own money, or money they get from others voluntarily.

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