Wrong Focus on Student Loan Program
The federal government likely offers student loans at subsidized, below market fixed rates. Unlike private lenders, it does not take into account such factors as a student’s credit history, their ability to pay back the loan, whether a student has a co-signer, etc. In 2007, Congress cut this fixed interest rate on new loans temporarily from 6.8% to 3.4%. This artificially low rate was extended for one year in 2012, and if Congress does not act, the rate will rebound automatically to the original 6.8%.
The Smarter Solutions for Students Act (H.R. 1911) would replace the 6.8% rate with one pegged to high-yield 10-year Treasury notes plus 2.5%. In 2013 and 2014, that is expected to be only 4.4% and 5.0% respectively (increasing the cost to taxpayers in the first few years). If interest rates rise as projected, the loan rate will increase up to a cap of 8.5%. However, if rates stay low, students would receive the subsidy at the expense of taxpayers.
Proponents claim that this rate would be “market-based,” but this is misleading. While the fixed rate would shift to a variable rate based on a common market indicator, the bill does not reform the student loan program to either gradually remove the federal government from the student loan business or require students to pay interest in line with what they would without a subsidized loan program. In fact, an analysis at the New America Foundation estimates the actual market rate for student loans would be somewhere between 12 and 18 percent.
The Congressional Budget Office projects that the bill will save $3.7 billion over ten years, but this estimate is based on accrual-based accounting – not a real-world “fair-value” accounting that would take into account the fact that students may not pay back their loans, particularly because of the federal government’s lax lending standards, leaving taxpayers holding the bag. Even CBO admits that their method does not present an accurate picture of the cost of the student loan program.
Many proponents of this bill argue that the bill is an attempt to inject some market forces into the program, knowing that Congress will politically never let the student loan rate rebound to 6.8%. These sorts of conventional political assumptions that rarely take into account the opportunity of legislators to lead and move the public debate in favor of limited government are why the country is running a nearly $17 trillion debt. Put aside that mere inaction is all that is required to increase the rate back to 6.8%, what makes these same proponents think that the same invincible political pressure that requires action now will not be present the minute interest rates start to rise? Of course, the same political pressure will be there in the years ahead to overturn the increase because Congress is refusing to do the hard work to reform the student loan program and reduce students’ dependency on the federal government.
Conservatives should oppose this bill and instead focus on insisting that CBO score the student loan program using “fair-value” accounting and then find ways to get government out of the student loan program all together.