Democrats and Republicans have created a panderfest over heavily subsidized student loans that go primarily to middle-class students, writes Rick Hess. Interests rates were cut — “temporarily” — in 2007. Now President Obama argues the lower rate should remain in force because of the tough job market.
But the debate only affects loan costs for people starting college in 2012-13, which means theyre mostly relevant for grads entering the workforce in 2017, or later. Is the President trying to tell us that he expects the job market to still be brutal in 2017?
His lower-rate plan would apply only to new loans, and only to loans taken out under the federal Stafford Loan program. He’s not helping previous borrowers get out from under their mountains of debt. He’s helping new borrowers build their own debt mountains.
A serious student-loan reform would link “students’ ability to borrow” to “the likelihood that they’d be able to pay” the loans back, Reynolds argues.
Right now, student loans are sold on the basis that “college” promotes higher earnings. But “college” isn’t an undifferentiated product. Some degrees — say in Electrical Engineering — increase earnings dramatically. Others — in, say, gender studies — not so much. A rational lender would be much more willing to finance the former than the latter.
Now, student debt can’t be cleared in bankruptcy. That should change, Reynolds argues. But colleges should bear some of the costs. “Obama’s interest-rate ‘fix’ . . . just pumps more hot air into the bubble.” Reynolds new book, The Higher Education Bubble, is due out in June.