The Obama administration would have us believe that without Washington’s help, the college dreams of millions of young Americans will be thwarted come Monday. That’s because, unless Congress can reach a deal, interest rates on federally subsidized Stafford loans are set to double, from 3.4 percent to 6.8 percent, on July 1.
President Obama talks of a doomsday scenario for college students, who, he says, will face a $1,000 spike in their college costs unless Congress takes action. Often left unsaid is that the extra $1,000 is over the life of the loan, meaning students will actually see an increase of around $7 per month if the rates are allowed to double.
Also absent from the administration’s talking points is the fact that the federal government created this mess in the first place. Back in 2007, congressional Democrats and the Bush administration halved the interest rate on federally subsidized Stafford loans for five years. But that change was only temporary, and now interest rates are set to revert to the 6.8 percent rate.
Maintaining the 3.4 percent interest rate is bad policy. Such federal subsidies do little to fundamentally reduce the cost of college. Since 1982, the cost of attending college has increased 439 percent, despite roughly proportionate increases in federal subsidies such as Pell Grants over the same time period.
Moreover, the $6 billion price tag associated with maintaining the 3.4 percent rate is passed on to all taxpayers — three-quarters of whom don’t hold bachelor’s degrees (and presumably earn less, on average, than the college-goers they are subsidizing). Given the well-publicized wage premium associated with a college degree, it is not unreasonable for college students to pay their own way through college, especially when students come from middle- or upper-class backgrounds.
And unlike federal student loans, which don’t take student risk into account when offering loans, private lenders such as Wells Fargo can assess different interest rates based on risk factors such as creditworthiness and the type of school a student plans to attend.
Subsidizing student loans is bad policy regardless of how it is paid for, but Congress is compounding the problem by proposing an “offset” to the bill’s price tag that may not be an offset at all. The details here are a bit tricky, but stick with us. The Senate has already passed a transportation bill that purports to raise revenue through changes to private-sector-pension accounting rules. The agreement between Senators Harry Reid (D., Nev.) and Mitch McConnell (R., Ky.) would use some of the revenue from those changes to offset the student-loan bill’s cost.
The pension rule changes are twofold. First, private companies running pension plans would need to pay higher premiums to the Pension Benefit Guaranty Corporation (PBGC), the quasi-governmental agency that insures private pensions. This is an increase in revenue, which should help reduce the chances of a taxpayer bailout of the agency, not finance more spending.
Even more problematic is the second change, which would allow businesses to make smaller contributions to their pension funds each year. Businesses like this, because it decreases their costs. The federal government likes it, too, because it increases tax revenues. (Pension contributions are tax deductible, so the lower the contribution, the higher the tax.)
But when an offset somehow leaves all interested parties happy, taxpayers should be suspicious. When businesses contribute less to their pension funds, it increases the risk of defaults on their pension obligations. If the defaults are extensive, the PBGC would need a bailout from taxpayers in order to cover the insurance claims.
In other words, the “offset” contains a major new cost — the increased risk of having to bail out the PBGC — that does not appear to be accounted for in the agreement’s cost estimates. (Details of the agreement remain sketchy.)
Accountants and actuaries are needed to estimate the precise cost of this greater risk, but the total offset is likely lower than what is being claimed. In fact, the new cost could actually be even greater than any of the legitimate revenue enhancements being offered — meaning that spending to subsidize student loans may be “offset” by . . . more spending.
Keeping student-loan interest rates at 3.4 percent and further subsidizing higher education is bad policy. The “offsets” offered, which actually contain new hidden costs, are more bad policy on top of it. If federal policymakers genuinely want to drive down college costs, they should consider decreasing federal subsidies for higher education in general.
— Lindsey M. Burke is the Will Skillman Fellow in Education and Jason Richwine is Senior Policy Analyst in Domestic Policy Studies at the Heritage Foundation.