President Obama visited colleges and universities on a three-state tour promoting his proposal to keep the interest rate on new federal student loans at 3.4 percent, writes Matthew Chingos on the Brookings Institution’s Up Front Blog. The temporary rate reduction passed in 2007 is scheduled to end in July, which would return the rate to 6.8 percent.
Obama’s proposal — now endorsed by Romney — won’t help current college students, graduates or dropouts, writes Chingos. It only applies to new loans.
President Obama asked University of North Carolina students, “Anybody here can afford to pay an extra $1,000 right now?” Nobody would. Subsidized loans accrue no interest until students leave college.
There is no doubt that many college students and their families are being squeezed by rising college costs. And there are good reasons for the federal government to provide financial assistance to help low-income students afford college. But charging below-market interest rates on student loans is an inefficient and likely ineffective way to encourage college enrollment and completion because students don’t pay any interest until after they leave college.
“If Obama and Romney want to buy the votes of struggling college students, they should at least propose the more efficient path of increasing the grants that students receive when they attend college, not decreasing the interest they pay after they leave,” Chingos writes.
Federal policy should prioritize grants for low-income students over tuition tax credits that benefit the affluent, argues Education Sector in a new report.