The Distraction of Interest Rates for Student Loans

Everyone who has a loan or has a child with a loan is upset with Congress, which left for its 4th of July recess without preventing the doubling of interest rates for federal student loans.  As of July 1, rates will double from 3.4% to 6.8%.

In an interview with Boston NPR station WBUR yesterday, Senator Elizabeth Warren was asked about her role in trying to tackle the issue.  She said not only should Congress have moved to keep rates the same, but should adopt her proposal of pushing rates down to 0.75%, the rate at which large financial institutions are able to borrow from the federal government.

(a)

Her reasoning is that every time the federal government extends a low interest loan it is investing, long-term, in that sector.  Think of the way in which Fannie Mae and Freddie Mac back the 30 year mortgages that help spur the economy.  Rather than profiting off of students, the government should be investing in them.(1)

Even though Sallie Mae is a private company, she used the lender as an example of why rates should be set to 0.75% for students.  She pointed out on Capitol Hill on Monday that Sallie Mae made $2.5 billion off of student loans in 2012.  Warren asked why Sallie Mae can get loans from the federal government as low as 0.23% while they charge 25 - 40 times that rate for students.(2)

In the middle of the interview with WBUR, Warren said the bigger issue that needs to be addressed is the cost of college.  Quickly the interviewer returned to her pre-drafted list of questions, asking about rates.

The rate issue is the immediate one, and since it can be addressed by Congress with the wave of a pen (followed by lengthy posturing and arguing), it is the most expedient.  But will keeping rates at 3.4%, or if Warren gets her way, 0.75%, will that really be fixing anything in the long run?

This year college debt eclipsed the $1 trillion mark.  That level of debt saddling college graduates is dragging down the economy.  In the past recent graduates would begin purchasing houses, cars, and making the kinds of buys associated with those big ticket items.  Now, because of the level of debt, the purchases are being postponed.

Will I be shot for asking the question:

Why shouldn't student loan rates be 6.8%?

Why shouldn't the uncollateralized debt of an 18 year old, who doesn't have to start paying until age 22, be any lower than what the market demands?  If I was a lender how safe would my tens of thousands of dollars in loans be with a kid who is trying to "discover himself?"  I can't take his degree away after he fails to pay me back.

In fact, what would happen to the cost of college if rates not only doubled to 6.8%, but tripled to 10.2%?  Would we see annual increases in college tuition continue at 4%?

My argument is that the cost of college has risen and is continuing to rise at such a rate that even if the federally-backed loans in question were offered at 0% the accumulated principal would be too large for anyone to get a decent start out of school.

Consider the cost of higher education over time.  "Tuition and fees at public universities have surged 130% over the last 20 years while middle class incomes have stagnated."(3)

According to the College Board, the total cost of higher education has steadily increased over the last 30 years:

Adjusting for 2012 dollars, in 1988 a public 4-year college cost $8,453, and a private 4-year college was $21,048.  In 2012, a public 4-year college cost $17,860, and a private 4-year college was $39,518.  These figures represent the total cost of tuition, fees, room, and board.(4)

Is it possible that the heavy subsidies of student loans have contributed to the rising cost?  What incentives do colleges have to reign in their costs when students keep borrowing more and more?  I hope that Senator Warren makes headway in getting Congress to address the larger issue of the growing cost of higher education and not just the doubling of the interest rate.

(a) Sen. Elizabeth Warren, Photo Mar 7, 2013. Cliff Owen/AP

(1) http://www.wbur.org/2013/07/01/warren-student-loans

(2) http://thehill.com/blogs/on-the-money/banking-financial-institutions/308519-sen-warren-spars-with-sallie-mae-on-student-loan-rates

(3) http://money.cnn.com/2011/06/13/news/economy/college_tuition_middle_class/index.htm

(4) http://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fee-and-room-and-board-charges-over-time-1972-73-through-2012-13-selected-years