THE BLOG

Lowering the Interest Rate Won't Solve the Student Debt Crisis

04/28/2015 03:19 pm ET | Updated Jun 28, 2015

Senator Elizabeth Warren has reintroduced her bill allowing borrowers with outstanding student debt to refinance at lower rates. Her similar bill was voted down last summer. This will certainly appeal to those students with high-interest rates in the 7-8 percent range, but it won't help the many students who are struggling to pay their debt, and are close to the default.

Surprisingly, those with the most amount of debt have the best repayment records. They will clearly benefit if interest rates are cut in half as advocated by Senator Warren. Perhaps counter intuitively the students with smaller debts are most likely to be in default. About 35 percent of defaulters have only $1,000 to $5,000 in debt, an additional 28 percent have debt ranging from $5,000 to $10,000. Refinancing these loans with Warren's bill will only help lower their monthly repayment by $5 to $10, which is not enough to prevent them from defaulting. A Brookings Institution analysis argues that this bill is not as progressive as it seems, estimating that "the poorest quarter of households would receive less than one-fifth of the benefits of such a proposal."

Does interest rate relief offer a real solution for what ails student debt or is it a temporary band aid that diverts our attention? In my view, as long as tuition continues to rise and the government continues to subsidize it, pumping billions into colleges in the form of student loans, no cure exists.

Tuition goes up by 3.7 percent on average each year in the last 30 years. From 2011 to 2012, this increase roughly equals to 5 billion more in total revenue for all colleges. The interest on that amount is approaching $350 million*. You tell me which sum is the bigger problem. Imagine if the government told the car industry or the airlines that as long as they held price increase to below 5 percent each year, the government would guarantee whatever loans were necessary for customers to pay for their products. That's exactly what the government tells colleges with a wink of the eye. And then they dish out the loans to pay for it.

Earlier this month on WBUR, Senator Warren disputed Republican claims that Pell grants help colleges jack up tuition, but why didn't she look closer into the role that loans play instead? I think she is wary of any link between financial aid and higher tuition because it would add fodder for Republicans to cut aid without any replacement. That would be a body blow to both students and colleges.

So instead she points her finger at states which have lowered support for public colleges. It is true that states have decreased support for higher education and those colleges and universities have partly offset this loss in revenue by increasing tuition. But what is less understood is that both states and colleges have been free riding on federal student loans. This is effectively helped transfer the cost of higher education onto students and their families.

At this point, simply increasing state aid, as Senator Warren demands, may not help either. In fact, it might only further fuel tuition increases. Colleges and universities are bound to set the price so that they eat up all the revenue available to them. Renewed increased state aid will simply be another revenue source for colleges to eat, leaving plenty of room on their plates for federal loan payments.

*At 7 percent interest rate