SHOULD the government subsidise the loans students take out to pay for university? Washington's politicians seem in little doubt: Republicans and Democrats alike are in favour. But how generous should the terms be? That question is much thornier--so thorny, in fact, that Congress failed to answer it before adjourning for the Fourth of July holiday. As a result, the law permitting the most generous subsidies lapsed this week. The government will still offer students loans, but at an interest rate of 6.8%, twice the previous one.
The change does not affect any of the 39m Americans who currently owe the government a collective $1 trillion in student debt. Their rates were fixed at the time of borrowing; the new one applies only to new loans. Moreover, only about a quarter of the loans to be issued this year will be of the most generous sort, the Congressional Budget Office (CBO) estimates. Others already carry rates as high as 9%.
Yet the question is a weighty one. The CBO reckons the government will lend students a further $1.4 trillion over the next decade. The business is profitable, in that the government charges borrowers a higher rate of interest than it pays on its own debt. But the students' rates are fixed, whereas the government's borrowing costs vary over time. Much of the money goes to middle-class students. Its easy availability may be one reason why college fees have risen so much faster than other prices in recent decades.
Ideas for reform abound. The House of Representatives approved a bill earlier this year that would allow the interest rate on future loans to float. Borrowers would pay whatever the government pays on its ten-year bonds, plus 2.5 percentage points. Republicans in the Senate have proposed a three-percentage-point spread, with the rate fixed for the life of the loan. Democrats, on the whole, favour lower fixed rates, although with much variation in the benchmark rate, caps on interest and so on.
Most observers assume that Congress will pick one of these options over the summer, before colleges send out their tuition bills for the new academic year, prompting students to submit their loan applications. At the very least, it could extend the current system for a year, as it did in 2012. But do not expect much soul-searching about whether this is the best use of the government's money, or how college could be made more affordable. ------------------------- SIDEBAR PHOTO: Sen. Joe Manchin (D-WV) speaks during a press conference after meeting with fellow Democratic Senators, on Capitol Hill. Manchin spoke to reporters about student loan legislation. (Drew Angerer / Getty Images / July 9, 2013) *************************************** -- Jerry P. Becker Dept. of Curriculum & Instruction Southern Illinois University 625 Wham Drive Mail Code 4610 Carbondale, IL 62901-4610 Phone: (618) 453-4241 [O] (618) 457-8903 [H] Fax: (618) 453-4244 E-mail: email@example.com