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July 8 2013

Congress Stalls on Student Loan Interest Rate Freeze

Vicki E. Alger

Congress failed to extend the 3.4 percent annual student loan interest rate by the July 1 deadline—meaning rates could return to 6.8 percent on new loans.

Several plans were floated by Members of Congress and the president—but none of them gained any traction. As Inside Higher Ed reports:

Subsidized student loans, which go to just under half of new undergraduate borrowers, are available only to students determined to have financial need. (Unlike unsubsidized loans, available to all undergraduate students, subsidized loans don’t accrue interest while students are enrolled in college.) About three-quarters of those loans go to students from families making under $60,000 per year.

Students who borrow the maximum amount of subsidized loans -- $23,000 over a college career -- will pay about $4,000 more in interest over a standard 10-year repayment plan. The average subsidized Stafford borrower takes out much less, about $9,000, and will pay about $1,500 more over the life of the loan.

No one wants college students to be saddled with more debt, but political tinkering with interest rates is at best a symptom of the larger problem of college affordability. The real malady is government meddling in education and lending in the first place—which adds to the cost, bureaucracy, inefficiency, and expense of a college education.

Ideally, there would be no federal involvement in education. That horse has long left the barn, and it will take years to reign it back in. A good first step is to redirect institutional subsidies to students in the form of grants.

Excluding federally subsidized student loans, approximately 17 percent of postsecondary institutions’ revenue during the 2009-10 academic year came from federal funding—up from about 14 percent during the 2005-06 academic year. In all postsecondary institutions nationwide received more than $28.4 billion in federal grants and contracts, plus $2.2 billion in federal appropriations, and another $20.7 billion in non-operating grants for a total of $51.3 billion.

For all that money college is becoming less affordable, and students are saddled with staggering debt. Rather than funnel all that money through postsecondary bureaucracies, it should instead be directed to students in the form of grants. If students do not complete their degree programs, those grants would convert to loans and have to be repaid based on the current market—not government jiggered—rate.

Some 21 million students were enrolled in college in the fall of 2009. Roughly half (49.6 percent) received federal loans. Directing the more than $51 billion in non-loan federal funding postsecondary institutions received to the roughly 10.5 million students who received federal loans would work out to roughly $4,885 per undergraduate.

Not only would students have cash in hand, they would be motivated to do their homework concerning institutions that offer the best programs at the best prices. After all, if undergraduates don’t finish they’d have to pay the money back.

Likewise, having to compete for students and their education dollars would introduce powerful incentives to keep costs and bureaucratic bloat down, while keeping student completion rates up.

There’s no such motivation with federal subsidies. Institutions get funded regardless of how effective—or not—they are.

It’s likely Congress will pass some student loan interest scheme this week—but don’t expect it to make college more affordable.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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