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.



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

  1. Paul says:

    There are several problems here, not necessarily with analysis, but with the issue in general of student loans, college tuition and affordability, and unemployed graduates.

    1.) College career planning and major selection are left almost entirely to unguided students. The average college student changes their major what? 3-4 times at least? Major changes can lead to extra semesters, or even years in college that could have been avoided if the Student were sat down at admission, and counseled as to what they wanted to do for a career as well as being given a ‘no bones about it’ talk about the expectations and demands of that career. Add in the penchant for departments to “recruit” students to change their major or to talk up politically correct program in Women’s Studies, and you’ve got a huge problem. Now you’ve got a college graduate who went in as an Accounting Major and graduated with a dual major in English and Women’s Studies. They don’t want to teach. So what do they do with their degree in English and Women’s Studies? Meanwhile they’ve racked up tens of thousands of dollars in student loan debt. We can cut back on the money pouring into universities and colleges by shutting down this sort of behavior. When John Student changes his major for say, the 2nd time? He’s immediately barred from registering for classes and told to go home and take a year off from school to determine what he wants to do.

    2.) The reality of a job market is something every person has to deal with. I, personally, have two degrees in History, a Bachelor’s and a Master’s. Inevitably I’d like to get my PhD and teach at the college or university level. But unlike the behavior in point 1, I chose this major knowing full well what it would prepare me for and what I wanted to do with it. The problem with graduate unemployment is from this notion of being “Overqualified” in a tough economy. Yes, I have a graduate degree in history. Yes, I am part of an honor’s society. Yes I have a very robust resume. But if I am applying to work at McDonald’s or as a cashier at Sear’s? It is because I have already tried and failed to find work elsewhere in the economy where my talents and education are put to use. Denying a job to someone who is demonstrably responsible, intelligent, and mature enough to get a college degree or a graduate degree for being “overqualified” is like barring someone from a weightlifting competition because they’re “too strong”. The job market assumes that I will be disloyal and immediately leave the job if they offer it to me. And in a job market where “Job Security” is arguably the biggest benefit you can get from a company that is practically drowning in applications due to a strong labor market? Then it is doubly insulting and problematic to assume that I am going to leave.

    3.) Colleges and Universities are competing with one another, but they’re doing it in the wrong way. They’re expanding programs, offering new majors, and updating campuses across the nation by renovation and beautification programs. This all costs money, however, and sadly that drives up costs. The answer to this one is already coming forward: Colleges and Universities offering accredited Online and Distance Learning programs. If I can get a Bachelor’s degree from a State University without ever setting foot in an actual classroom except for a minor residency requirement? Then I don’t need to have a brand new fancy dormitory building. I don’t need a meal plan of 20 meals per week. And that is precisely where costs skyrocket.

    At the University of Florida, one of the better schools for academics in the Southeast US? A Florida Resident living at home pays just 7250/year (2012-2013) in tuition and book fees. That cost skyrockets to $20,580/year when you add in almost 10,000 for food and housing, nearly 1300 on a per annum basis for computer and cell phone costs, about 1700 for clothes, transportation, and food, and another 1500 for Health Insurance. So almost 2/3 of the costs of a college education at the University of Florida can be offset if you live at home with your parents while you go to college, eat out of their fridge, live on their health insurance through their employers, and wear your normal duds to class.

    Full Time Tuition from 2011-12 increased by only 400 dollars to the 2012-13 school year. Note that this is all for In State tuition as a Florida resident. Out of State residents add about another 17,400/year. So God forbid you’re from any of the other 49 States, suddenly you’re paying almost double what the In State tuition costs are for living on campus.

    If we want to cut back on college costs? The better answer is not to jack up the interest rates on student loans or stop giving out student loans altogether, but perhaps a tiered solution where preferential loan rates are given out to those completing an online program or living at home. So Joe from out of State who is living on campus? He gets a much higher rate of education. He doesn’t -have- to go to University of Florida when he’s from, say, NY and has perfectly good SUNY schools to attend. So he can pay the government a much higher rate for the privilege of going out of state. Meanwhile, Bob from Archer FL which is just a wee bit outside Gainesville lives at home and does his degree mostly online with the exception of perhaps twice a week when he needs to drive to campus for some classes on Tuesday and Thursday. Because Bob is costing a lot less money and is not contributing to the problem of rising tuition costs nearly as much, he can pay a much lower interest rate.

    Above all, higher education should not be beyond reach merely because your family is not rich enough to pay for it out of pocket and you just weren’t able to get a full academic scholarship. Nor should you be forced to join the military or work 20 years before you can afford a Bachelor’s Degree so you graduate by the time you’re 42.

    There are ways to fix the problem and head off the impending ‘tuition bubble’ crisis without throwing the system of government subsidized student loans in the garbage.

    1. Rob says:

      Very thoughtful perspective. One thing I would point out about online education is the potential for the concept to reinforce “tiers” in education. Some theorize that top colleges, like the Ivies, are offering online ed to increase the value of their on-campus offerings, thus driving up tuition even more and further creating a class of “haves” and “have-nots” when it comes to college degrees. Just food for thought.

  2. California Mom says:

    I would respectfully ask this author if he has ever worked at a college or university. The theory in this article sounds interesting; if I did not have some direct experience with university administration, I would probably be convinced. But I work at a small Catholic university in California where most of our students pay their tuition through student loans. Tuition isn’t cheap, but university administrators really do their best to keep it as low as possible and around campus, I have seen very little waste, very little that could be cut and hasn’t. Perhaps we are unusual – I haven’t worked for any length of time at any other university – but the assumption that we will be corrupted if loans are available hasn’t proved true to date.

    1. kat says:

      Your school is the exception to the rule. Most colleges and universities have substantial endowments that could be used to offset these costs though. Harvard and other Ivy Leagues have such substantial endowments that all their students could attend for free for an increadibly long period of time (how long I don’t remember). Instead they have among the highest tuition costs in the country.

      1. The Real World says:

        *Most* schools have substantial endowments? That may be the case with Ivy league and other high fallutin private schools but even then these endowments are used for all sorts of purposes besides student financial aid. They could but they don’t pay for financial aid for students from working families. I know of many, many kids who recently graduated the top of their class and either didn’t get accepted into such schools or couldn’t afford them even with the financial aid that was offered. Believe it or not, many students have to take out loans to pay for public universities, many and probably most of which do not have substantial endowments for financial aid — especially for working families off of which they pull in most of their money.

    2. redandyz says:

      I am a (Catholic) financial aid director at a community college (non-Catholic), and most of our students receive some sort of additional aid, namely Pell grants, merit based scholarships, state grants, that in most cases this aid covers ALL of their tuition and fees, plus books. Yet we still have a ton of folks who take the subsidized loans just because they are eligible for it. My staff and I do everything we can to try and talk these students out of them, remind them they have to be paid back – but many disregard us and take their full loan amounts, which can be up to $10,500 per year, per student. My college has seen a 100% increase in the amount of loans paid out over the last 5 years, with less than a 5% increase in enrollment. I hate to see these kids strapped with loan debt, especially when the kids getting the loans have their nails done, have gucci bags, and drive nice cars. When I was in college, the term “poor college student” meant exactly that. I think we have such a relativistic society and this generation of kids expect to maintain the same level of comfort as they did under mom and dad’s roof, or in the case of the community college with more older students, rely on the aid to supplement their unemployment and food stamps. Also, the community college is the PERFECT PLACE for those with limited resources to go to get started. We have transfer agreements in place with over 10 different regional 4 year schools. A lot of it has to do with just getting the word out to the public!

      To respond to the raise of the interest rates – these kids are going to take the loans regardless of whether the rate is 1% or if they are 20%. It really does little to provide greater access to college. it is a myth.

      1. C. Chase says:

        I suggest you publish this letter in your college student newspaper and sign your name to it. All the kids who take out loans have their nails done, have Gucci bags, and drive nice cars, huh? Funny coz at my community college, most students rely on public transportation.

    3. Joe M says:

      While I have no doubt that many educators have the best intentions, the numbers don’t lie. The cost of education has grown at a much higher rate than inflation.

    4. Tim Shaughnessy says:

      I’ve been a faculty member for ten years, and taught a few years in grad school. As others have mentioned, your experience seems to be an exception. 1) it’s a small private school which, just like private companies, must pay close attention to its bottom line and can’t let costs spiral out of control.
      At my (public) school, too, because of drastic state funding cuts, we’ve been forced to slash a big portion of our budget. I don’t think one can look at the last two or three years of education costs and consider them typical. Look at the Consumer Price Index for Higher Education and compare it to the All Items Index.

      1. California Mom says:

        I am “Ca Mom” who posted the original comment. I have to say that getting “dislikes” to a genuine inquiry is very discouraging. One of the potential advantages of internet dialogue is learning and I posed my question with genuine interest, not implied criticism. Seeing “dislikes” is like a punch in the stomach; it does nothing to further understanding. I wasn’t even posing an argument, asking that we agree to disagree, but really inquiring – from those who have worked at universities, is there waste? I don’t see much at mine, but did not suggest that we are the norm or that my experience undermines the basic argument. Just seeking further understanding….

  3. tz1 says:

    How about simply allowing student loans to be cancelled in bankruptcy like almost any other debt (you do have to prove thongs in bankruptcy court)? Or ought we keep this virtual debtor’s prisons? If the creditors had risks they might not make $50k available for a degree in basket weaving. Also cheap credit caused the mortgage bubble – house prices rose to meet the cheap money. Tuition had gone up at a ridiculous rate – maybe if it wasn’t subsidized it would be affordable. Much of the content is on the web and much is free if you want the knowledge and don’t need dead sheep dermis.

  4. Randall says:

    The general rule for economic policy is that if Obama is for it, it is socialist (either overtly or covertly) and we must be against it. Thank you for coming up with some good talking points to oppose this one, I was having trouble coming up with any on my own.

  5. Fed Up says:

    You think that students who aren’t financially well off borrowing money to better themselves and make our society better are guilty of the sin of consumerism? It seems to me you should be more concerned about the sin of greed.

    1. Kat says:

      I don’t think that’s what he’s saying at all, though at first blush it feels that way. I, myself, owe about $60,000 in student loans and I had to leave school 9 credits short of my BA so I have neither a degree nor the added earning potential one would provide. I had/have no family support so loans were the only way I could go to college. The low interest rates are a kind of blessing because it keeps my interest accumulation at a minimum while my loans are continually defered since I can’t afford to make payments on them.

      Conversely, if student loans were not so widely available colleges would have incentive to keep costs down, thereby reducing the loan burden of those who must finance most of their tuition. Parents who really could afford to pay for college would have more incentive to pay upfront, rather than finance the cost so they can maintain their current level of consumption. Finally, graduates would have more incentive to pay their loans off quickly rather than make only the minimum payment so they can put their funds into 401Ks or buy a bigger house. The last 2 examples are definitely examples of consumerism…and greed.

      1. AngelNola says:

        That is exactly what the author said!! ” I would argue that low rates encourage the sin of consumerism which seems to be at least as offensive as the sin of usury” I have a very large student loan debt because I went to a Catholic university, rather than a state or public university. I could make larger payments if I had decided to work for a public school rather than a catholic high school where I make less than $2,000 per month, $500 of which goes to pay for my child’s Catholic elementary education. But go ahead, raise the rates, so sinners of consumerism like me are stopped!!!

        1. Amanda says:

          AngelNola, although I’m very glad to hear that you work in a Catholic school and feel your child’s Catholic education is important for you to sacrifice other things (I know I have made the same decision for my child as well), I don’t think you are looking at this correctly. When I was looking at colleges, my parents told me how much they could put towards my college education. I could spend it all in one year or in four, the choice was up to me, but if I needed anything extra then I needed to come up with the money myself. I had the option of being able to go to some pretty pricy schools, but I would have spent all the money my parents were going to give me in a matter of a year and a half. Although I was able to get a scholarship, it still would have been more money than I had available unless I wanted to take out a loan. The point is, we are all adults, you know what you are getting into when you pick an expensive school over a cheaper one. Yes, I could have gone to Yale, but since I knew what I wanted to do with my life I also knew that I would have a good 7 years of hard work to even start breaking even. Why should others be forced to pay my tuition with really low rates of return without their consent? You made the choice of going to a more expensive school, while being in a career that probably would only make you so much money. Personally I think that if the federal government is going to give out money it should be dependent on what your field of study is for. Let’s face it, most teachers don’t make that much and when they do get to the point of making better money it is 10 years down the road, depending on where they work. So although people may not think they are committing the sin of consumerism, well sometime we don’t realize these things until they are pointed out. Peace and Joy! Amanda

          1. angelnola says:

            You nor any blogger can tell me what sins I have committed. I asked my priest about this. He told me that in no way had my decision to attend a Catholic university and study my religion is a “sin of consumerism”. He actually laughed when I showed him this blog and your response. Also your argument is very flawed. I am not asking anyone to pay off my student loans for me. I am asking the government to not double my interest rates. Big difference! Also, by your suggestion you are equating the value of an education with the amount someone will make in a particular field. Where in a monetary sense alone perhaps does not make sense for me to study at a Catholic university, because of the return of salary I would make is much less than the money I put into my education; however what about the education of one’s soul? Can that be measured by money alone? Is the salary I bring home reflect the amount of children’s lives I have touched in a positive way. It seems you are the one putting a money value on the worth of one’s vocation! The fact is I received 22 dislikes, for what? For my commitment to promoting Catholic education both in myself and in others? Or perhaps because I have chosen to given up many of the “sins of consumerism” to live out my vocation? No it is because I not agree with the author’s weak argument and have presented facts of why it is incorrect and too broad.

          2. Leia says:

            So why do your interest rates get to be half the rate of mine just because you started and/or finished after me? I went to a Catholic University, got a degree in Chemistry and in no way am I against your interest rates being raised.

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