In the last few weeks President Barack Obama's plan to keep the interest rate on student loans at 3.4 percent (rather than allowing them double them in July, as the law currently requires) has become an important part of the American political discussion. It provoked considerable debate in Congress and even inspired the president to show up on late-night television to “slow jam” about the policy change he proposes.
But how important is interest rate on federal student loans, really? Keeping the rate low is probably good, but it’s not that important. The administration and even Republican opponents (who have proposed their own solution to keep the rate low) are talking about this as if it’s an important effort to cut colleges costs. According to a piece at the Center for American Progress:
Young Americans and their families simply cannot afford to have Congress sit by and do nothing while the interest rates on Subsidized Stafford Loans are set to double in July. ... It is imperative that Congress acts to keep college affordable for 7.4 million college students and their families.
It might be the administration’s most important effort to deal with college costs, but if so, that’s pretty disappointing, because it doesn’t really do anything to reduce the cost of college. Keeping the interest rate low, it turns out, would save the average borrower about $9 a month.
According to an article by Jordan Weissmann at The Atlantic:
Inane politics aside, what's frustrating about this issue is how little it matters in the scheme of college affordability. States are still spending less on higher-ed than they were ten years ago, despite dramatic increases in enrollment. If colleges could easily make themselves more efficient, this might not be a problem. But it's proven extremely difficult to create productivity gains in education, even with the help of modern information technology. So instead, tuition has increased. The federal government has responded by expanding grant aid and the availability of student loans. Sadly, this may have just encouraged some colleges to increase their tuition, rather than focus on cutting costs. We don't know how severe this problem really is; researchers have reached mixed, often contradictory conclusions. But overall the literature suggests it might be real.
The other problem is that loans don’t really make college more affordable, they just force the students to pay the cost after they’ve left school.
The student loan interest debate is a sideshow, Weissmann writes. It might be worse. It actually might be we call a red herring, a deliberately misleading detail to distract people from the actual issue.
The current debate over the student loan interest rate allows politicians of both parties to pretend that they’re working to correct an issue and keep “college within reach.” Americans can concentrate on the strategies they’re pursuing to keep that rate low. But the interest rate on Stafford student loans is a very small part of the real problem with college costs, which is that students have huge loans.
I really, really want to believe this is something the federal government is going to address (because state governments have just given up now) but the bizarre political fight over this very minor issue suggests that real reforms won’t be forthcoming.
Granted, keeping the interest rates on student loans where they are is probably a pretty good thing. New college graduates will have the most debt in a generation. Their job prospects are also likely to be pretty crappy. They shouldn’t have to pay more money because of the actions of Congress.
But fixing this problem is a good thing the way, say, doing the dishes is a good thing; what we really need is a kitchen renovation. This is a minor, minor fix.
[Cross-posted at the Washington Monthly]
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