The big catch phrase for those fighting to keep subsidized student loan interest rates at 3.4 percent is “don’t double my rate.” That’s because the rate is set to increase from 3.4 percent to 6.8 percent on July 1. But if President Obama’s Rose Garden pep rally today is any indication, the phrase should be more like “don’t raise my rate at all.”
The POTUS attacked recently passed legislation in the House–which tracks pretty closely with his own proposal–because, he said, it doesn’t do enough to keep loan rates low. Really? The Smarter Solution for Students Act–which, by the way, is hardly all that smart–would set interest rates for subsidized loans at the 10-year Treasury note plus 2.5 percent. Today, that rate is 2.3 percent. Adding 2.5 to it is 4.8 percent, absolutely not a doubling of 3.4.
Of course, T-bill rates could, and likely will, rise, but the main point is supposed to be to make student loan rates track with normal interest rates rather than have politicians set them arbitrarily. That was certainly the case over the last few years, when student loan rates didn’t plummet along with overall rates. But it seems a tracked rate isn’t really what students and colleges want: they want super-cheap–preferably free–loans, which makes sense (for them). Like normal people, they want money at as little cost to themselves as possible. Unfortunately, but not surprisingly, that is what many vote-seeking politicians want to give them, despite the powerful evidence that aid mainly lets colleges raise their prices at breakneck speeds, fuels demand for frills, and abets serious noncompletion. In other words, it likely does more harm than good.
All of this is why Washington should get out of student aid entirely. But for that to happen, regular people will have to make their catch-phrase, “Don’t give them loans at all.”