The current debate over the student loan interest rates is a perfect example of how crazy our national politics have become. Leaving aside the differences in how Democrats and Republicans would pay for continuing this questionable subsidy, both parties are striving to appeal to students in this election year by keeping interest rates low while ignoring the economic reality that this move will further balloon student debt and could lead to higher tuitions as well.
How did we get to this perilous spot? The answer lies in the desire of politicians not to offend key constituencies no matter how much it might cost in the short run and no matter how little it may improve things in the long run. And keeping the interest rates low now makes it even more difficult to achieve the kinds of student loan reforms we need to put the system on a solid footing for the future.
This particular story begins in 2007 when a Democratic-led Congress and a Republican Administration agreed to halve the interest rate on those federal student loans in which the government pays the interest while borrowers remain in school, from 6.8 percent to 3.4 percent. As Rick Hess of the American Enterprise Institute has recently noted, some analysts warned five years ago that halving the interest rate would lead to complaints that loan burdens have grown too large and arguments that the lower rates must therefore be continued. Now that the time has come to renew or abandon the provision, those predictions are coming true.
Some of us also believe that the ready availability of student loans helps to explain why tuition levels continue to climb because it allows institutional officials to feel more comfortable that students and parents will be able to pay for these higher tuitions. Keeping rates low in the future will just continue this trend.
But when faced with questions about whether keeping interest rates low will help or hurt, both political sides are making some really silly responses. For example, Education Secretary Arne Duncan recently was asked about whether student grants and loans had contributed to the run-up in tuitions over time.
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