We should all be so lucky as to have our crises be like the looming interest rate change on some student loans. Yes, the rate on subsidized federal loans will double on July 1 absent congressional action, but that needs to be put into context to see that it’s a potential “crisis” – as I heard it described on a radio news report last Friday – akin to your yacht sinking. Your toy, bathtub yacht.
Starting July 1, rates on subsidized loans – a subset of federal loans in which taxpayers eat beginning interest payments as well as bearing non-repayment risk – are set to rise from 3.4 percent to 6.8 percent.
That might sound bad, but note that the rates have only been at 3.4 percent for a year. A 2007 law set them on a gradual decline from 6.8 percent to 3.4 percent over five years. So it’s not like 3.4 percent has been the norm for decades…or even two years.
Next, the rate increase will only affect loans originated after July 1. People with existing loans won’t suddenly see the rates on all their subsidized loans double.
Third, while a rate doubling sounds big, the practical effect according to the White House’s own calculations will be to add about $1,000 to an average loan over its lifetime, which is about ten years. That translates into an additional $8.33 per month – less than the cost of a DC movie ticket.
Finally, freezing the rate for another year will do almost nothing for currently suffering middle-class families, unlike what the White House intimated in President Obama’s most recent weekly address. The large majority of loans originated after July 1 won’t even begin to be repaid for at least another year-and-a-half, after rising seniors have graduated and gone through the six-month repayment grace period.
It’s well known that a crisis is extremely useful for affecting political change – just ask Chicago’s mayor – but it often translates into bad policy. And that’s exactly the kind of policy that creating artificially cheap student loans is. They help fuel skyrocketing college prices, subsidize massive college waste, and contribute to millions of people enrolling who either never complete their studies or who finish largely worthless degrees.
All those consequences are problems that Washington really should worry about. But that’s the other thing about a crisis: It’s usually only embraced when it means giving stuff away to buy lots of votes.