Should We Keep Student Loan Rates Very Low?

EDITOR’S NOTE: Please join me in welcoming guest blogger Tim Shaughnessy to the CV Blog.

Seems the Obama administration will make lowering student loan burdens an issue leading up to November. Come July 1, student loan rates are set to double. Clearly, low interest rates encourage more rather than less spending, so in what better city to push low rates than Vegas where excessive spending keeps the town afloat? There, Obama told students “the No. 1 [sic] thing Congress should do for you is to stop interest rates on student loans from going up,” which itself speaks volumes about his philosophy of the role of government, namely, that it should do things for specific groups at the expense of other groups rather than enforce unbiased law.

I’ve tangentially written on this issue twice before: 1) on the morality of excessively low interest rates, or what I called “reverse usury;” and 2) on student loan debt and its effect on vocations. Combining the two posts into one statement on the morality of low rates, I would argue that low rates encourage the sin of consumerism which seems to be at least as offensive as the sin of usury (says the economist with no training in moral theology).

With usury, we hate loan sharks because lenders take advantage of borrowers. With artificially low rates (whether on student or home loans; see below), borrowers can take advantage of lenders, especially if the involuntary lenders are taxpayers. One might argue that education is too important for cost to be prohibitive, so even if taxpayers are stuck with the bill, it’s worth it to achieve a greater good. But certainly there can be lots of other important causes that a taxpayer (present or future) would otherwise fund if their income had not been taxed. My tax bill is higher in order to finance loans to current students, so I therefore have less money to put into my own sons’ college savings accounts. But since they can’t vote yet, Obama likely isn’t concerned with them.

Why worry about student loan rates now? Because of the “broken economy,” in the words of the US Bishops. If graduates had great job prospects this would all be moot since they’d have the income to afford the higher loan rates, but thanks to the housing-bubble-induced Great Recession the jobs aren’t there. So since students can’t find jobs, why not cut them some slack on their rates?

Consider: 1) students take out loans to pay college expenses, which have skyrocketed. At the same time, the amount of financial aid has risen. It may sound chicken-and-egg, but I think the much stronger case is that the availability of easy-to-get federal dollars reduces the incentive of colleges to curb their costs. Financial aid makes college more expensive, not less. 2) the availability of jobs depends on the supply of and demand for workers. By granting abnormally-cheap student loan rates, the supply of college-educated workers increases relative to the demand, making jobs harder to come by and the value of these workers and a college education in general to fall.

Antony Davies has a great explanation (and video, if your attention span is like mine) of the unforeseen negative effects of subsidizing higher education via taxpayer-funded student loans, arguing that artificially cheap loans fueled the housing bubble and will do the same in higher ed:

[T]he price of a college education soared—just as one would expect from a market flooded with cheap money… And just as home buyers took out loans to speculate on houses they could never hope to afford, students are taking out loans to cover educations they often cannot complete and which often do not hold value in the market even when completed. Government meddling has again separated profit from risk. Universities get to keep the tuition profits while taxpayers are forced to shoulder the risk of students not paying back their loans.

Once again government has created the conditions for wholesale failure, and failure is upon us.

So, while compassion may urge us to ease the financial burden of graduates, especially those who cannot find work, compassion again should urge caution when considering the financial burden that will be placed on the rest of US taxpayers.

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22 thoughts on “Should We Keep Student Loan Rates Very Low?

  1. Leia says:

    I agree with the author. If low interest student loans were not available from the federal gov’t I would have gone to the state school that offered me a merit based scholarship to cover the cost of tuition rather than a Catholic University that was Catholic in name only. Either way I still work at a lab making the same money as my co-workers who all went to cheaper in state schools, so my higher tuition rates had no higher value than a public university. The higher rates do not mean you get anything more for your money but as long as the money is available the schools will keep charging higher(inflated) tuition rates.

  2. [...] Tim, I once heard it said that an economist is an accountant without the personality. And I’m sure you’ve heard the jab that goes something like “he’s the economist who predicted seven of the last three recessions.” But all kidding aside, as a practitioner and teacher of the dismal science your point is well taken that artificially low student loan interest rates are helping build a bubble. [...]

  3. Rob says:

    From a Chicago-area university advancement department, this article is ridiculous. Universities are bedrocked by endowments. The strongest universities are the ones that are least dependent on tuition (which can be unpredictable) and most dependent on giving (more stable). What was most affected by the recession, from a university perspective? Endowments and giving. You bet the cost of college is going up…it’s called economics. Further, you allege that ALL colleges simply let costs rise because of the availability of loans. The only way this theory makes sense is if there is no competition and colleges are colluding…which is against the law. Quite a claim.

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