Shifting interest burden won't cut college costs

January 23, 2007|By Leslie Carbone

The House of Representatives last week approved a plan to increase federal higher-education spending. The measure moves on to debate in the Senate.

The policy's financial planning looks a lot like the stereotypical undergrad's.

The College Student Relief Act of 2007 would cut the interest rate on subsidized student loans in half over a period of five years - from 6.8 percent to 3.4 percent - effectively shifting the balance of the cost from those students to the general public. The plan would cost taxpayers nearly $6 billion, according to the Congressional Budget Office.

That's because the legislation won't really cut student loan interest rates; it will cut the portion paid by graduates. The federal government guarantees student loan companies such as Sallie Mae a certain rate of return; if market interest rates spike, taxpayers cover the difference. Taxpayers also continue to assume much of the risk on defaulted loans.

The proposal would offset its costs by reducing government payments to student loan providers. But those lenders could simply pass the increased costs on to borrowers in the form of reduced benefits.

The plan's proponents cite the advantages of a college education as an argument for expanding aid - as though the federal government were the best supplier of all that is desirable. The College Board estimates that college graduates earn a lifetime average of $1 million more than people without college degrees do.

But critics counter that the plan won't really expand access to college. As Republican Rep. Jeff Flake of Arizona said, "It is unclear whether such a burden on taxpayers would help make college more affordable."

It might do exactly the opposite: make higher education more expensive. It's the classic third-party-payer problem. People are more likely to buy something if somebody else pays for it.

College costs have been rapidly outpacing inflation for decades. According to the College Board, the cost of attending a private college has soared by 52 percent, adjusted for inflation, since the 1991-1992 academic year; public colleges have increased costs by a whopping 86 percent in the same time span. Tuition and fees for the current academic year at private, four-year institutions reached an average of $22,218 - up $1,238, or 5.9 percent, from last year. Prices at public, four-year institutions went up 6.3 percent, or $344, to $5,836.

Since 2001, direct student aid has exploded from $9.6 billion to $48 billion. During the same period, the number of students receiving such aid soared by nearly one-third, from 7.6 million to 10.1 million. If the $6 billion cost estimate for the interest-rate cut is correct, that scheme alone will cost nearly two-thirds as much as all direct federal student aid just six years ago.

But this spending won't even reduce financial pressure on current students. That's because those with subsidized loans don't pay the interest while they're in school; the taxpayers do. As Rep. Howard P. "Buck" McKeon of California, ranking Republican on the House Education and Labor Committee, observed recently, the proposal "provides benefits to those who are no longer even students." College grads don't start paying back their loans, along with the interest, until six months after they finish - and that's only if they don't enroll in graduate school.

So the College Student Relief Act is really the College Graduate Relief Act - the expansion of a regressive wealth-transfer program benefiting a demographic group earning $1 million more per capita than the hardworking American taxpayers without college degrees who will have to pay for it.

It's time for policy-makers to take a hard look at the reasons for escalating college costs - including rapidly rising federal student aid - and to pass policies that really can make college more affordable, such as tying aid increases to the inflation rate and demanding that colleges account for excessive increases in tuition. This is a better way forward than expanding entitlements that ultimately lead to higher tuition costs.

Leslie Carbone is an adjunct scholar at the Lexington Institute. Her e-mail is leslieannecarbone@yahoo.com.

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