The American Interest
Analysis by Walter Russell Mead & Staff
Student Loan Rates Set to Double—So What?

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.

Published on June 28, 2013 11:30 am
  • Pait

    I suppose that the estimable WSJ columnist is not aware of the power of compound interest. Otherwise he would know that interest can be a large part of debt, that interest rates matter, and that the debt grows faster than the percentage figure.

    • Kavanna

      He’s not saying that the interest isn’t a bad thing. He’s just saying that it’s not the fundamental problem. It’s the loan principals = cumulative tuition paid.

      It’s the tuition, stupid! :)

      • Pait

        Interest can be a very large part of the total payment, as anyone who can compute compound interest knows. So the interest rate may well be the fundamental problem in many cases.

  • Mat

    While I agree something needs to be done, the suggestion of keeping the universities on the hook financially would create yet more perverse incentives for professors like me with regards to grade inflation / lowering standards. There’s already next to no incentive to push the students to work hard, if this happened, we’d get even more pressure from the administration to “leave no child behind.”

  • wigwag

    g Here we have even more evidence of Republican stupidity or, at the very least, a Republican Party deeply engulfed in a political death wish.

    First, let’s review; during the last presidential election the Democrats won: (1) 71 percent of the Latino vote; (2) 76 percent of the Asian vote; (3) 93 percent of the African American vote; (4) 70 percent of the Jewish vote and astoundingly, (5) 55% of the female vote (because females vote in much higher numbers than males, the gender gap was18 percent.

    To make matters far worse for Republicans, voters between the ages of 18 and 29 voted in record numbers in 2012; they represented 19 percent of the total electorate. Obama captured 60 percent of the votes from this cohort.

    So how does the GOP react to this catastrophic plunge in support among young voters? They scream from the hills how appalled they are at the Supreme Court’s pro-gay marriage decision, and they refuse to capitulate when it comes to capping the interest charged on student loans? How exactly do they expect that to go over with young voters?

    Professor Mead is right; the real problem is the horrendous increases in college tuition that produce literally nothing of value for the students matriculated in those colleges. Perhaps if the GOP lawmakers were as vociferous about hurling invective at college administrators as they are at hurling invective at teachers unions, they might convince young people that their concerns matter to the Republican Party. Instead, the GOP has decided to target the students who borrow money to pay for the inflated tuition. This will not go over well with young voters who already look at the GOP with deep suspicion.
    The GOP has already alienated Latinos, the fastest growing population group in the United States. With there behavior on student loans (and gay marriage) they are in the process of alienating youthful voters GOP.
    The extent of the problem that this represents for the GOP should not be underestimated; it’s not only going to kill the GOP chances in the next few Presidential elections, its going to damage the GOP’s chances
    with Latinos and young people for generations.
    Once people get in the habit of voting a certain way, it is very difficult to break them of the habit. The Jews, Italians and Irish who were welcomed by Democrats in the early part of the 20th century have been inclined to vote Democratic ever since; we’re talking about a century worth of voting. Latinos will remember for a long time that while Democrats were trying to provide there undocumented family members with a path to citizenship all the GOP wanted to talk about was building higher walls. Young voters will remember for many years how culturally backward the GOP’s position on gay marriage was and how they were happy to let the interest rates on their college loans skyrocket.
    Those young voters won’t be young forever. By the time they grow older, they will be confirmed Democrats.
    How stupid can the GOP be?

    • RobSaxan

      Truer words have never been spoken.

    • Jim__L

      Chasing after youth votes doesn’t play to the strengths of Conservatism. “If you’re not Liberal at 20 you have no heart”, as the saying goes.

      Give them a few years and some experience of how the world actually works, and immature liberal voters turn into mature conservative voters. The best plan for the GOP is to press the transition age downwards, by constantly hammering on how Democrats’ sparkling plans actually make a mess of young peoples’ lives, finances, and the society that those young people will inherit.

      • wigwag

        You make a fair point. Young people often become more conservative as they become older and the realities become starker. As their incomes rise they are more likely to be drawn to a Republican Party that supports lower taxes. As they age, they are also more likely to become religiously observant which also nudges them in a Republican direction.

        Still, with all this said, a habit of voting Democratic is not an easy habit to break. The failure of the GOP to compete for these voters while they are young will result in tens of millions of fewer votes for Republican presidential candidates over the next 10 or 15 presidential cycles; the GOP is shooting itself in the foot.

        What the GOP desperately needs is a strong leader capable of delivering a sequence of “Sister Soulah moments.” The reality is that the segment of the population that propelled the GOP ever since Richard Nixon invented his “southern strategy” is finished; white males are simply a far less important part of the electorate than they once were.

        To regain its sea legs with the multitudinous elements of the electorate that it has offended, the GOP needs to not only abandon its reliance on the remnants of the southern coalition it needs to prove itself by actively and loudly disassociating itself from the conservative white men who are its core supporters.

        If the GOP refuses, it will die, at least at the presidential level. By the way, this doesn’t mean that it has to abandon its core conservative values. It can paint gay marraige as an important element of its family values orientation. It can stop insulting women who have abortions and the doctors who perform them and instead talk about the issue strictly in terms of states rights. It can take credit for providing tax cuts for 90 percent of Americans and stop getting hysterical if taxes are raised for the very wealthy.

        Most importantly, GOP leaders can start reading Via Meadia; while Professor Mead gets alot wrong, he lays out almost every day a platform that a smart progressive conservative can run on. Disintermediate health care and primary and secondary education; recalibrate pension programs to make them stronger and more durable; carve out a strong role for the federal government in something it is good at-funding science R&D; use the funding power of the government to break the backs of college bureaucrats who are ruining the country by making higher education so expensive.

        Unfortunately the GOP is to sclerotic to think about any of this. Instead they would rather cater to a smaller and smaller cadre of older white men who believe that if only we could kick all of the Latinos out and make gay men marry women whether they want to or not, everything would be like it used to be in the good old days.

        The GOP is in the grip of a crippling dementia. Whether that dementia is permanent or temporary remains to be seen.

        • Jim__L

          White men are, and will remain for the foreseeable future, the most influential minority of the American electorate.

          What the GOP needs to do is demonstrate how its message is universal and human. What the Democrats’ operatives (like the honorable WigWag here) try to do is cynically exploit the fiction that race matters. Racism as a white person’s disease is fading into history; whether the Left is held to account for its “reverse” racism will determine whether the Democrats will survive the aftermath of Obama-the-charismatic’s departure from the scene.

          When the GOP demonstrates (by way of “omg we’re” Republicans) the universality of the moral and economic values labelled as “conservative”, the GOP will be unstoppable.