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As congressmen (and their opponents) debate the merits of various financial bailouts of the last few years, one opinion piece in the Los Angeles Times considers that it might be time for another bailout, this time for student loans. The piece is a year old, but still actually very timely. David Lazarus wrote:
I’m sympathetic, but only because the government has already shown itself to be a soft touch for banks, insurers, carmakers and especially for homeowners, who in many cases had no business taking out loans they couldn’t repay.
In that context, I think it’s perfectly reasonable for college students and recent grads to seek a little bailout of their own.
The Lazarus plan is not some half-baked scheme for the government to throw money at someone else’s problem. Lazarus only wants the country to get a hold of the interest rates on student loans. As he points out, interest rates on government-backed student loans can range from 6.8 percent to 8.5 percent. Really. This is at a time when the interest rate on a 30-year mortgage is about 5 percent.
Ideally, policymakers should encourage more people to go to college, not less. Now obviously people have only themselves to blame for signing up for unmanageable student debt. But that’s the problem, it’s unmanageable. As Lazarus explains,
The whole idea of a government-subsidized loan is to help fund the sky-high education costs of people who have nowhere else to turn. These are precisely the people who shouldn’t be paying above-market interest rates.
One of the best ways to facilitate college attendance is to make student loans more manageable for students, college graduates, and their families. An 8 percent interest rate? That’s not a way to get more people through college. That’s the sort of thing that would ordinarily be known as loan-sharking.
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Ben Miller on October 18, 2010 2:47 PM:
The problem with the interest rate argument is that it ignores two crucial facts: 1) student loans are a fixed interest rate, 2) interest rates are at basically the lowest point they've ever been. When the market picks up, interest rates will rise again and suddenly that 6.8 percent fixed rate looks pretty good.
The fact is, we had floating interest rates for years and that was difficult because you never knew what your rate could end up being. In general, getting a fixed rate is a good thing--there's a reason why economics has the idea of a certainty equivalent--people like having a set sense of what they will owe.
Also, keep in mind that student loans require no collateral and are given to people with little to no credit history. I guarantee you couldn't walk into a bank and get a fixed interest rate loan anywhere close to 7.9 percent (the highest rate now on PLUS loans because the 8.5 percent figure was for FFEL PLUS). If the interest rate was such a bad deal, then a private lender would come in and undercut the market. The fact that no one does should indicate that it's a pretty good deal.
Finally, remember that most student loans aren't all that big. They halved the interest rate on subsidized Stafford loans back in 2007 and I believe the best savings anyone gets out of that was a few thousand dollars over the entire lifetime of a loan.