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?

Keeping interest rates low is “doubling down on failure,”writes Glenn Reynolds (Instapundit) in the New York Post.

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.

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  1. If you look at the economics of law school, and the amount of debt students incur to complete their programs, Reynolds may be shooting himself in the foot – absent the government guarantee, what lender would take that risk?

    I would put some, preferably most, of the risk of loss on the academic institution. Require them to buy insurance for their students’ loans, and to bear the consequence in the form of increased premiums if they have a disproportionately high default rate. (You would have to transition into such a program in order to avoid creating an immediate, significant expense.)