Subsidizing Inflation: What’s going on with Student Loans?

Eyeglasses with newspaper and coffee cup

One of the big debates in the spring of 2012 was how much the federal government should continue to subsidize student loans. The legislation that ended up becoming law – which I criticized in three posts for Hot Air, The American Spectator’s blog, and Americans for Limited Government’s blog – kept student loan rates artificially low and included an oversized transportation bill.

With all of the focus on the food stamp bill in the House, the immigration bill in the Senate, and Scandalmania, this year the student loan discussions haven’t gotten much attention outside of the Beltway. Yet, according to Politico, Congress is nearing a deal to prevent loan rates from going up on July 1:

A bipartisan group of senators is close to reaching an agreement to stop student loan rates from doubling on July 1, aides said Thursday afternoon.

The legislation would represent a compromise between the plan pitched by President Barack Obama and Senate Republicans. It would link the rate of new loans to Treasury bonds and lock the rate in for the life of the loan — a key priority for the White House that was missing from a House Republican bill.

Politico points out why this issue is so important for our elected officials:

If the rates are allowed to double from 3.4 percent to 6.8 percent on July 1, it’s not something many voters are likely to miss, making this the type of issue that has real political consequences for whoever is seen as being to blame for inaction.

The House has already passed its own proposal, albeit one the Senate has thus far refused to look at. The key differences to be worked out appear to be whether to reduce the deficit or not – and whether rates should be locked in or fluctuate.

All this sounds like normal self-obsessed partisanship in Washington, and it is. Much like they did with the farm bill, House Republicans are pretending their bill is less bad than the Senate’s bill, thus it is worthy of becoming law. Both parties appear to be willing and able to ignore the college bubble such subsidies create (emphasis added):

With costs of earning a 4-year undergraduate degree growing by about 5.2% per year, more students are taking out student loans. Freshman Massachusetts Senator Elizabeth Warren who has been touting her new bill called, “Bank on Student Loans Fairness Act,” which seeks Federal Reserve funding to subsidize Stafford Loans. Her bill would set interest rates for federally-subsidized loans at .75% for one year compared to the current rate of 3.4%, which is set to double on July 1, 2013.


The problem with this bill is that it’s repeating the same failed policies of minimizing lender risk through taxpayer subsidies while keeping interest rates artificially low to encourage more loans. With the United States national debt now at over 16 trillion dollars, can we afford the Federal Reserve pumping out more credit to stimulate higher education growth?

Like any other subsidy, artificially keeping student loan rates low incentivize market distortions. We saw it in 2008, with the financial crash, and it looks like Washington hasn’t learned its lesson.

Here’s another fun little factoid about this particular subsidy I found last year:

The lower rate was put into place as a “temporary” policy in 2007, but like many so-called temporary measures it has now been extended. Apparently elections are more important than the quality of higher education in Washington…

Once again, a “temporary” policy designed to garner political support at the expense of both current and future generations is being made into a de facto permanent policy.

However, just this once, Congress may have been too clever for its own political good. The Senate and House would have to agree on a bill this week to avoid a rate jump starting next week. A Senate leadership staffer says negotiations over the student loan issue are ongoing, but given the short time frame — and competition for floor time with the immigration bill — anything to hit the floor would only do so as the result of a Unanimous Consent agreement, or with an exceedingly short debate. It is doubtful Senators Paul, Cruz, and Lee would allow either to happen.


This means, despite the emergency-laden rhetoric from both parties, students may see the subsidy on loan rates end after all, even just temporarily. While this will cause many students financial pain in the short and medium-term, the “tough love” approach favored by fiscal conservatives is far preferable to the irresponsible Beltway approach of more spending and ever-greater market distortions.