College (Loan) Football: The Looming Interest Rate Hike

Over the weekend, President Obama urged Congress to prevent a pending interest rate hike on student loans. While he argued that failure to keep interest rates low would be a “tremendous blow” to students, he failed to note that federal overreach into the industry is largely to blame in the first place.

The Obama Administration’s overreach into the student loan industry has been wide-sweeping. In what The Wall Street Journal deemed “that other government takeover,” a provision buried deep in Obamacare effectively nationalized the student loan industry by ending government subsidies to private lenders and putting the federal government in charge of originating and servicing federally backed student loans.

The Obamacare provision came in addition to the Administration’s decision in 2011—made through executive order—to forgive student loan debt after 20 years. And it comes in addition to the Administration’s gainful employment regulations restricting access to student loans for students attending for-profit institutions.

But the current debate’s origins are in separate legislation passed in 2007 whereby the federal government set interest rates on student loans artificially low, cutting the rates in half temporarily for four years. Now that the interest rates are set to increase, President Obama is pressing Congress to keep rates low.

John Kline, chairman of the House Education and the Workforce Committee, stated last week:

After gaining control of Congress in 2007, then-Speaker Nancy Pelosi (D-CA) and Rep. George Miller (D-CA) championed H.R. 2669, legislation that only temporarily phased down interest rates for subsidized Stafford Loans made to undergraduate students over four academic years, at which point the rate would revert back to 6.8 percent.… [E]xtending the 3.4% interest rate on subsidized Stafford Loans made to undergraduate students for one year would cost roughly $6 billion.

Part of the problem is a system where virtually anyone is eligible for a student loan, regardless of credit history or repayment potential. But unlike other loans, taxpayers are on the hook when students default or incur other losses.

Debate over interest rate hikes are part of a larger problem with federal involvement and ever-increasing subsidies for higher education. The cost of attending college has increased 439 percent since 1982 (after adjusting for inflation). Continuing to increase federal subsidies hasn’t helped reduce college costs and has likely exacerbated the problem over the decades.

There are better solutions to drive down the cost of college. Shifting from debt-based to savings-based college financing, limiting access to federal student loans to four years of undergraduate work, and—with the proliferation of online learning—allowing the free market to work to reduce college costs are all policies that would provide needed relief to both students and taxpayers.

http://blog.heritage.org/2012/04/24/college-loan-football-the-looming-interest-rate-hike/

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