Government Spending

Breaking: Reduced Student Loan Rates Won't Be Offset by Cuts Elsewhere


The Wash Post spray paints the writing on the bathroom wall: "For a good time and low, low student loan rates, call Barack and Boehner."

The Dems and the GOP are both committed to keeping federally subsidized Stafford Loans for college students at the low, low rate of 3.4 percent fixed interest over a 10-year repayment period. That's down from 2007's 6.8 percent rate and the reduction will run out on July 1 unless Congress does something (private-market rates for student loans range from 6 percent up to around 12 percent for a fixed rate, a figure that presumably prices students' lack of collateral and credit history).

I ran the numbers on the 6.8 percent versus 3.4 percent here; on $10,000 over 10 years, it adds up to about $2,000 more. Given that the student borrower captures all the value of an expected increase in lifetime earnings (valued at somewhere between about $250,000 and $1 million), it seems fair that they foot the higher interest rate. Hell, at the 12 percent rate, the difference is just $5,400 more over 10 years. Still a good deal for motivated students (and one that doesn't put taxpayers on the hook for defaults or subsidies).

In any case, the GOP has proposed various ways to pay for the extension of the 3.4 percent rate, including:

In one proposal, the cost would be offset by increasing the amount federal workers pay for their retirement.

In the other, a freeze on loan rates would be paid for through a combination of items: shortening the period during which part-time students would be eligible for federally subsidized loans; limiting the ability of states to recoup Medicaid costs through taxes on providers, which would lead to a slight reduction in Medicaid use and, therefore, lower costs to the federal government; and improving coordination with states and local governments to reduce Social Security overpayments.

To which Arne Duncan, the secretary of Education, issued this great statement, worthy of the double-speaking nuns who taught me so well at St. Mary's and Mater Dei High School in New Monmouth, N.J.:

"If they are not serious proposals, they are not ones we will take seriously."

The only thing missing was an invocation of the great mysteries whose answers will only be revealed to us once we are one with God in Heaven (which won't happen if you keep asking so many questions!).

So the Dems don't want to discuss actually paying for the continuation of the lower loan rate (which a Democratic Congress insisted on sunsetting when passing it five years ago). How do we know that the GOP will ultimately cave on just going along with the lower rate? First off, they're Republicans. Second, the Wash Post (from which the above indented quotes are taken) writes

[Speaker John Boehner] added that the rate could be lowered retroactively if the deadline passes and said the GOP should not let the Democrats use the date to force a deal, said a person who was present at the meeting but was not authorized to speak about the matter publicly.

More here.

And I'm still asking: Why the hell should new student loan borrowers pay less than older ones? And, even more important, Why are we subsidizing loans for students in the first place? They get to keep the extra earnings they make, so it's only fair that they take on the extra risk, isn't it?

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  1. Given that the student borrower captures all the value of an expected increase in lifetime earnings…, it seems fair that they foot the higher interest rate.


    1. “They get to keep the extra earnings they make, so it’s only fair that they take on the extra risk, isn’t it?”

      I know, isn’t he just asking for trouble trying to use logic and common sense?

      1. At least part of those extra earnings go to the government via taxes. I wonder if more people would be willing to take on the extra risk if they didn’t have to worry about those increased taxes.

        1. Yeah, I don’t think I should have gotten a subsidized rate for my law school loans (and they have now ended graduate loans) but I’ll have paid the amount of the subsidy in taxes many times over before I’ve paid the loans off.

  2. I read in the NYT that the notion that student loans drive up education costs in not a serious idea because as everyone learns in Econ 101 subsidizing some thing doesn’t cause an increase in demand for that thing and an increase in demand doesn’t cause a rise in price.

  3. Wouldn’t it be more accurate to say ‘they get to keep all the value of an expected increase in lifetime earnings’ less the difference in taxes (and possibly rate) between the expected earnings with and the expected earnings without a degree?
    I sure don’t get to keep 100% of the delta between my allegedly greater income due to my degree and what I would allegedly be making without said degree.

  4. Why not give everyone cheap loans to chase girls, drink beer, and party all the time.

  5. If I’m understanding the reasoning here correctly, why doesn’t the government just cut the rate to zero? Or forgive the loans entirely? Or, better yet, send ten times the amount owed to each debtor?

    1. Or forgive the loans entirely?

      That’s coming. Of course, most people seem to be too stupid to understand that debt is always paid off by somebody. Either the borrower bears the cost, or, if you “restructure” or forgive the loan, the lender does.

      So, I expect that we will see the votes of indebted former students purchased by forcing the costs of their debts onto a combination of the taxpayer (via guarantees) and whoever holds these things in their portfolio (pension funds, etc.).

      1. Or just crop-dust college campuses with newly printed cash?

      2. You mean evil Wall Street corporations? Fuck them, they make windfall profits at the common man’s expense.

        1. Jokes on you guys, all my loans are held by the federal government.

          1. But evil corporate fat cat “persons” originated those loans, intended solely to oppress you.

            1. I haven’t seen of heard of that in quite a long time.

  6. They get to keep the extra earnings they make,

    Well, at the top marginal rate, over half, anyway.

    1. You’ll get to deduct the interest…

      Oh wait, you were just phased out.

  7. I’m currently paying back my 6.8 percent loan. In fact, today is payday so I sent off an extra $500 to pay it down faster. Why do the kids that are one year younger than me require the interest rate to be half that amount?

    1. They don’t penalize you for paying more?

      1. Very few loans penalize you for paying off ahead of schedule anymore.

        1. Used to be pretty standard in subprime loans. Is that a thing of the past now?

          1. Was that back before the Fed was created, grandpa?

            1. Prepayment penalties? I guess if the Fed were created after 2000.

      2. Nope. I’m at the point that if I go back to minimum monthly payments now I will end up saving about $3000 by the end of the loan.

    2. I’m in the same boat, so this plan is basically not only do I have to pay off my loan, now I have to help pay off someone else’s too.

  8. A more important point is that when you subsidize something, you get more of it. That applies in many aspects to the higher education bubble, most notably in that when you subsidize tuition (with cheap money), tuition goes up. At some point, the cycle needs to be broken and the imbalances rooted out of the system.

  9. The student loans should be tied to the prime rate. If we loan criminal banks, (look at all the foreclosure frauds the banks have done, and if corporations are people why aren’t the CEOs in jail instead of being paid obscene bonuses) money at the prime we can certainly loan money to future the same rate.

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