No compromise on student loans

Interest rates on federally subsidized student loans double today from 3.4 percent to 6.8 percent. The Democratic Senate leadership blew it by rejecting a sensible bipartisan compromise, writes Matthew Chingos of the Brookings Institution.

The new proposal, from a group of senators including three Republicans, two Democrats, and one Independent, offers a permanent fix to the now-annual problem of Congressional meddling with interest rates by instead tying rates to the market.

The bipartisan compromise would fix the interest rate for the life of the loan, so there’d be no surprises for borrowers. It also cuts rates on unsubsidized loans used by students from middle-class families. “By charging higher rates to graduate students and on the PLUS loan program for parents, the overall plan is close to budget-neutral according to the Congressional Budget Office,” Chingos writes.

Massachusetts Sen. Elizabeth Warren has proposed letting students pay 0.75 percent interest,  ”the same ultra-low rate that banks currently get on short-term loans from the Federal Reserve,” notes Glenn Harlan Reynolds in the Wall Street Journal. Linking interest rates to the market rate is “immoral,” Warren said, rejecting an earlier Republican proposal. What’s Really ‘Immoral’ About Student Loans is not “the still historically low interest rates, but in the principal of the thing,” writes Reynolds, a University of Tennessee law professor who blogs as Instapundit.

Student debt, which recently surpassed the trillion-dollar level in the U.S., is now a major burden on graduates, a burden that is often not offset by increased earnings from a college degree in say, race and gender issues, rather than engineering.

According to an extensive 2012 analysis by the Associated Press of college graduates 25 and younger, 50% are either unemployed or in jobs that don’t require a college degree. Then there are the large numbers who don’t graduate at all. According to the National Student Clearinghouse Research Center, more than 40% of full-time students at four-year institutions fail to graduate within six years.

. . . According to a recent study by the New York Federal Reserve, “the share of twenty-five-year-olds with student debt has increased from just 25 percent in 2003 to 43 percent in 2012″ and “student loan delinquencies have also been growing.”

Colleges have continued to raise tuition — and add administrators — because subsidized student loans have made it possible to get away with it, writes Reynolds, author of The Higher Education Bubble. They can accept students with little chance of earning a degree or finding “gainful employment” and collect the loan money up front. “If students are unable to pay the loans back, the burden falls on taxpayers (if the loan was “guaranteed” by the federal government), and the students themselves, while the schools get off scot-free.”

A serious student-loan fix would change this incentive. First, federal aid could be capped, perhaps at a national average, or simply indexed to the consumer-price index, making it harder for schools to raise tuition willy-nilly. Second, schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default. I would favor allowing students who can’t pay to discharge their loan balances in bankruptcy after a reasonable time—say, five to seven years, maybe even 10—with the institutions that got the money being liable to the guarantors (i.e., the taxpayers) for, say, 10% or 20% of the balance.

“Universities would be much more careful about encouraging students to take on significant debt unless they are fully committed first to graduating, and second to a realistic career path that would enable them to service that debt over time,” Reynolds predicts.

But this goes against federal policy, which calls for all students — including those with little chance of earning a degree — to try college.

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