Student loan rates are set to double on Monday as US Senators failed to reach a compromise and headed home for the July 4 recess. But as the estimable Glenn Reynolds writes in the WSJ, the interest rate isn’t the real issue. None of the plans on offer—Republican, Democrat, or White House—will fix the core problem with student debt. “The debt would be crippling,” Reynolds writes, “even if the interest rate were zero,” because the price of a college degree is too high:
[One] way to approach costs is to remove the incentives for universities to accept government-subsidized student-loan money regardless of a student’s prospects of graduation or gainful employment. Under the current setup, incentives run the other way: Schools get their money up front via student loans; if students are unable to pay the loans back, the burden falls on taxpayers (if the loan was “guaranteed” by the federal government), and the students themselves, while the schools get off scot-free.
A serious student-loan fix would change this incentive. First, federal aid could be capped, perhaps at a national average, or simply indexed to the consumer-price index, making it harder for schools to raise tuition willy-nilly. Second, schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default. I would favor allowing students who can’t pay to discharge their loan balances in bankruptcy after a reasonable time—say, five to seven years, maybe even 10—with the institutions that got the money being liable to the guarantors (i.e., the taxpayers) for, say, 10% or 20% of the balance.
Read the whole thing for an excellent look at the student debt crisis, and Congress’s frustrating unwillingness to do anything about it.