Mike Kueber's Blog

April 27, 2012

Keeping the interest rate on student loans artificially low

Filed under: Uncategorized — Mike Kueber @ 11:58 pm

I recently blogged about Pell Grants after learning that my youngest son was not eligible because his parents apparently made too much money or had too many assets.    In my blog, I took the magnanimous position that, although government spending that enabled poor kids to afford college was money well spent, I had no objection to stopping that spending for kids (and their families) who could already afford it.  The federal government, after all, doesn’t have unlimited resources.

Today a friend forwarded a related opinion article by Mike Brownfield from the Heritage Foundry.  In the article Brownfield criticized President Obama for proposing that the federal government should continue to subsidize the student-loan interest rate so that its stays artificially low at 3.4% instead of rising to its free-market level of 6.8%.  Brownfield said Obama’s proposal was election-year pandering.  I’m surprised Brownfield didn’t mention how critical Obama was of John McCain in 2008 when McCain proposed suspending the federal gas tax.  Obama called McCain a panderer for his gas-tax proposal, yet four years later Obama is making a proposal that is highly analogous.  Does the word hypocrite come to mind?

My friend forwarded the article to me because he thought Brownfield made some devastating points, but I disagree.  In my opinion, Brownfield is making irrational and/or cheap political points.

For instance, Brownfield criticizes Obama for proposing to fund the $5.9, one-year extension by taking money out of ObamaCare.  In almost the same breath, Brownfield asserts that ObamaCare needs to be repealed.  There is an old saying that one shouldn’t let the perfect be the enemy of the good.  Instead of criticizing the downsizing of ObamaCare, Brownfield should graciously accept this small improvement.  Isn’t it a better idea to spend $5.9 billion on subsidizing poor kids’ college loans instead of having ObamaCare’s Prevention and Public Health Fund spend the money?

And to show that he is not the only pundit who rhetorically believes that the perfect can be the enemy of the good, Brownfield quotes approvingly from another pundit:

                The supposed benefits of keeping the interest rates at 3.4 percent are largely illusory, and the president is selling students a bag of magic beans. Economist Douglas Holtz-Eakin explains on National Review‘s “The Corner”:

  • “[The interest rate increase] sounds serious. After all, there are 39 million Americans with student loans owing over a trillion dollars of debt, and interest rates doubling from 3.4 percent to 6.8 percent would be a huge hit at a time when households are already struggling.  Serious, except that the president’s plan would apply only to those 23 million loans being borrowed directly from the federal government. Except that not all of those would benefit; it would apply only to the 9.5 million loans being borrowed through the so-called subsidized Stafford loans. Except the lower rate would apply only to new borrowers who apply this year. Except that no payments are made until after graduation, so it would not help anyone for several years. Except that it would lower monthly payments by an average of only $7.”

              In other words, for an incredibly high cost, students are realizing very little benefit.

 Actually in other words the program doesn’t help enough kids, therefore it should be eliminated?  That would be like arguing that the current Pell Grants should be going to more kids (currently they go only to kids from families that make less than $50k a year) and because America can’t afford to extend it to kids from families making between $50k and $100k, we should end it for all kids.  I wonder where Brownfield and Holtz-Eiken learned logic and reasoning.  Hmmm – Brownfield has a J.D. from Loyola Law and Holtz-Eiken has a Ph.D. from Princeton.  That figures.  Only someone with a doctorate could think such crazy thoughts.   

Brownfield concludes his column by arguing that government subsidies are a bad idea for two reasons:

  1. None of this is to say that the federal government should spend even more to subsidize student loans in an effort to make college more affordable. It absolutely should not. Federally subsidized student loans are handed out to millions of college students regardless of risk — let alone whether they can handle college-level work. Thanks to taxpayer backing, the loans are offered at rates far below what private lenders would offer. When the students can’t afford to pay, the American people are stuck with the bill.
  2. On top of all this, government intervention in the higher education marketplace hasn’t even succeeded in bringing down college costs. In fact, the price of a degree has risen right along with government spending. Pell grants have increased 475 percent since 1980, and yet the cost of attending college has increased 439 percent since 1982. It’s a vicious cycle that will only get worse with more government subsidies.

I disagree with Brownfield’s first argument because, as Ronald Reagan said, when you subsidize something, you get more of it.  America wants more kids going to college.  Of course, there are some kids going to college that are not motivated and are financially irresponsible (also, there are predatory, for-profit schools), and the government programs should be tweaked to address those problems.  But to recall an old public-policy cliché – mend it; don’t end it.

I disagree with Brownfield’s second argument because, unlike the housing bubble that resulted from too-easy money, I don’t think reasonable people believe that the college industry is in the midst of a pricing bubble artificially propped up by kids with too much “easy money.”

I hope my conservative friend who forwarded Brownfield’s keen observations to me doesn’t read this posting.  My friend already calls me a RINO and pretty soon he will be calling me a deserter or at least AWOL.



  1. I think I’m a reasonable person and I ABSOLUTELY believe that college costs have increased well ahead of inflation primarily because of all the easy government money. The more the system can expect the students to receive from all the available funding sources, the more they can and do ask. College seems to be an interesting case where if it were individual money being spent, it would have to hold costs back or price itself out of business, but because the mantra of ‘having a college education is a very good thing’ still resonates for a great many, they continue to accept most available funds, driving costs continuously and ridiculously higher. For most, college is no longer a good use of financial or time assets.

    If you consider the lost revenue and employment expertise for an individual spending four or more years, as it is generally reported that the average undergraduate degree now takes six years to complete, in school beyond HS plus the costs of attendance, you end up with a number that most students will never recover.

    The primary argument for college now should be attending for personal development and thinking skills. Unfortunately, that likely often doesn’t happen for the very individuals we are concerned about. Not everyone should get a college education and the taxpayers shouldn’t fund silliness. Let’s at least require reasonable costs and expect repayment of loans.

    Comment by bobbevard — April 28, 2012 @ 12:32 am | Reply

    • Bob, I stand corrected. I was too harsh to suggest that reasonable people must reject the hypothesis that easy government money is a major cause of tuition inflation. And it is intriguing to think about whether a pull-back on that government money would force colleges to find ways to be less costly. I had considered including that possibility in my posting, but then decided that I shouldn’t because I believed there was no comparision between the easy mortgage money and the easy college money. I think we can agree that the easy mortgage money was much more toxic to the pricing of houses, but I admit that easy college money could have an effect, too. I’m just not convinced that college money is that easy.

      Comment by Mike Kueber — April 28, 2012 @ 3:32 am | Reply

      • Mike, you are a thoughtful and reasonable man. I appreciate that.

        I suggest that what schools have learned is that whatever the price tag, funds will be made available. It’s why public schools can cost $20k or more and private institutions often upward of $50k. It’s why Law Schools and Med Schools are still being built. It is why underattended colleges are still building. It is also a primary reason why students will begin to move to virtual educations if they really want an education and at speed. Now, if someone will just provide a suitable diploma to match at a fair price.

        They also haven’t yet figured out how to leverage one student’s debt ten times like they did with housing :} If they do….

        Comment by bobbevard — April 28, 2012 @ 3:45 am

  2. my daughter starts texas tech this fall. they have the lonest “lazy river” on a college campus. we visited utsa as well. todays STATE schools are like resort hotels with professors! could this be an indicator of why even state college costs so much – could be. i say if you want a river at college go to texas state…

    Comment by q — April 29, 2012 @ 12:25 pm | Reply

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