Commentary: Get Congress out of student loans!

by Shayne SpenceShayne Rotator

Congress has failed the millennial generation yet again.  On July 1st, the interest rates on federal Stafford student loans doubled, from 3.4% to 6.8%.  Students around the country are now taking a second look at their college futures, not knowing whether they can afford the increase in monthly payments, or whether their investment will even pay off in the long run.  Faced with ever-growing debt and tax burdens, young people are questioning the traditional college approach, and turning to alternative education in droves.  Congress entertained various proposals that would have addressed this, but none were able to generate a consensus in both the House and Senate.

Some will blame it on Republicans in Congress, as is so popular these days.  Two Democrats offered different proposals.  Senator Dick Durbin (D-IL) proposed a plan to extend the lower interest rate for one year.  And Senator Elizabeth Warren (D-MA) offered a bill that would have lowered the interest rates to .75%, the same rates that large banks get from the Treasury.  Neither of these was able to make it through the Democrat-held Senate.

The Republican-controlled House passed a plan similar to President Obama’s proposal, which would have tied interest rates to the 10-year Treasury bond.  However, the President changed his position on it and the Senate never even looked at it.

The least plausible plan put forth is Senator Elizabeth Warren’s plan to offer loans at .75% interest.  Her reasoning behind this number is that “students should pay the same interest rate as big banks”.  While her sentiment is noble, her plan lacks any grounding in economic reality.  Banks get rates of .75% for “overnight loans”, loans with the shortest possible repayment period.  The reason the rate is so low is that the loan will be repaid before inflation overcomes the interest rate.  This is not the case with student loans, which are repaid over a much longer term.  By lending out money at less than the rate of inflation, banks would be lending at a loss.  Senator Warren’s plan would require them to do more of this, despite the fact that it runs directly counter to their economic interests.  This policy would only continue to increase education costs and student debt as a result.

Offering more of the status quo is Senator Durbin’s plan, to extend the low interest rates of 3.4% for another year.  This would allow students with only a year or two left to finish with the same interest rates they started with.  Again, this sounds great, until you look at what Senator Durbin proposed; to offset the costs of the extension by ending the tax deduction for retirement savings.  This would tax retirement money as people save it, rather than in the future, when they start drawing on that money.  It also precludes any growth those savings could have seen, which would result in more tax revenue down the line than it will raise now.  This type of short-sighted thinking is robbing the next generation and then buying us off with our own money.

The only economically sound plan proposed is the House Republican’s plan to tie interest rates to the 10-year Treasury bond rate.  This would take much of the volatility out of the student loan market, and would also lower the cost of money for students by nearly a full percentage point, to 2.5%.  In addition, students would be locked into that rate for the entire time they are in school, so if the economy suffers and the Treasury bond rate increases as a result, students are not on the hook for the increase.  But most importantly, this would tie interest rates to one set by the markets, rather than one set by Congress.  Students need stability when they are making one of the most expensive decisions of their lives.  Congress has done enough to create uncertainty and instability in the economy; maybe they should just leave this industry be.

Millennials need to get organized and get active if we want any hope of creating a future worth living in.  After spending $17 trillion dollars on our tab, the baby boomers want to end all the programs they benefited from just as we are starting to benefit.  Meanwhile the expensive Medicare and Social Security programs will continue to drain our paychecks every week.  We are being robbed of an education now and being robbed of our livelihood later.  It is time for President Obama and Congress to stop toying with our futures.

- Shayne Spence is working as a summer intern and Assistant to the President for the Ethan Allen Institute. 

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