Need-based student-loan interest rates are set to double on July 1 to 6.8 percent. If that happens, the loans will cost a little bit more for borrowers. If Congress stops the rate increase, the loans will cost a little bit more for taxpayers. A casual listener would never know that from the public debate. Student loans have become the rhetorical stump on which the Obama administration and Congress can argue about tangentially related political points.
Congress halved the interest rate for subsidized student loans in 2007, setting it at 3.4 percent for five years. (The interest rate for unsubsidized loans, which are available to all students and are not based on financial need, is fixed at 6.8 percent.) With the cutoff date for the lower rate looming, lawmakers who fear alienating students and their families are thumping their chests about stopping the increase.
President Obama and congressional Democrats are using student-loan interest rates as a chapter in a broader narrative about the high cost of college and the plight of middle-class kids who want to get ahead. At a time when student-loan debt exceeds credit-card debt, the narrative makes compelling campaign fodder.
GOP lawmakers say that Obama’s campaign on student loans is intended to divert attention from the administration’s economic failures. They cite the high unemployment rate for college graduates and bemoan the burdens on the federal Treasury of keeping the rate low without offsetting cuts elsewhere in the budget. Republicans are taking aim at their favorite campaign target, Obama’s health care law, in the name of providing relief to taxpayers. They want to use the law’s preventive-care fund to pay for a lower student-loan rate.
The discourse has gotten heated. Obama told students at the University of North Carolina (Chapel Hill) that perpetually high tuition “forces students like you to take out a lot more loans. There are fewer grants. You rack up more debt. Can I get an amen?” (The crowd complied.) Rep. Rob Woodall, R-Ga., sputtered in anger on the House floor that such talk was “pandering to their interests.… I’m trying to bring my blood pressure down.” House Speaker John Boehner complained that Obama’s actions were “beneath the dignity of the White House.”
The actual story of student loans is a lot less dramatic. Student borrowers aren’t going to wind up in the poor house if Congress fails to act. The 6.8 percent interest rate would apply only to new loans, which means that the 3.4 percent rate for existing loans would still be locked in. Most students take out new loans each year, so some of them may find themselves with a mixture of lower and higher rates by the time they leave school. The biggest impact would be on new student borrowers who max out at the $23,000 limit for subsidized loans. They would owe about $5,000 more over the course of a 10-year repayment period, or $500 a year—which is less than $50 a month. Cable television costs more.
“One of the reasons to go to college is because there is this substantial earnings premium over time. The least we could do is ask them to pay a reasonable market rate,” said Frederick Hess, director of education-policy studies at the right-leaning American Enterprise Institute. “If the only reason somebody decides to apply to college is because they hear there’s a subsidized interest rate, I’m not so sure this is the time and place for them to go college.”
Rich Williams, a higher-education advocate for the left-leaning U.S. Public Interest Research Group, disputes Hess’s assessment. “Critics like to nitpick, ‘Is that such a big deal?’ Well, yes. It’s hurting students. It’s death by a thousand cuts. More families are relying on student loans and struggling as college costs are increasing. The job market is totally uncertain. It’s a triple whammy for students.”
Student loans are just one part of the complex financing package that prospective students and their families put together when they are considering college. A typical financing plan for a low-income student includes a Pell Grant, a subsidized loan, and often a supplementary unsubsidized loan. Some colleges reduce tuition based on a student’s financial need, but state budget cuts have hurt public universities so much that those scholarships barely help. Public-college tuition has more than doubled over the past 20 years.
Keeping interest at a fixed low rate for student borrowers salves a few of those “thousand cuts.” Most Republicans agree with Democrats that it’s a worthy cause. It makes long-term economic sense, because the demand for skilled workers exceeds the supply, and college graduates are key to filling that gap. Presumptive Republican presidential nominee Mitt Romney shares with Obama the bottom-line goal of keeping need-based loan rates at 3.4 percent.
The trouble comes when the bill arrives. For every $1,000 in student loans, the federal government fails to recoup $120, according to the Congressional Budget Office. That translates into a $3,000 subsidy for a $25,000 loan. That’s true even in times of very low interest rates, because student loans are a riskier bet than private loans. They don’t require credit checks, and they come with generous deferment and forbearance policies. A one-year freeze of the 3.4 percent interest rate adds $6 billion to the overall cost for the government.
Halving the student-loan rate was a politically calculated move five years ago. It was part of House Minority Leader Nancy Pelosi’s “take back the House” agenda in 2006. The pressure to keep it is a political move now. Just don’t mistake the debate for a substantive discussion about college affordability or debt.
This article appears in the May 5, 2012, edition of National Journal.