There are rumblings from Capitol Hill that the long national nightmare of the student loan interest rate saga may be coming to an end (for a year, anyway). Politico reports that Senate leaders Harry Reid and Mitch McConnell are close to a compromise that would extend the current 3.4 percent rate on subsidized Stafford Loans for another year. The sticky point, of course, is how to pay for the $6 billion price tag. The Politico story describes a few options that are on the table—the usual shell game, where tweaks in some unsuspecting program are used to pay for some other misguided policy.
Given how polarized, petty, and ineffective Congress has proven itself to be over the past year, you might be tempted to see this development as “progress” or “problem-solving.” You would be wrong.
For one thing, the temporary solution itself makes little sense. It just sets up another round of partisan bickering and smoke and mirror budget tricks 12 months from now. Haven’t we learned this yet?
What’s more, a perfectly rational solution to this particular problem is hidden in plain sight. As Jason DeLisle of the New America Foundation wrote in May, the Congressional Budget Office has scored a proposal to tack the interest rate on all new student loans to the rate on a 10-year Treasury bill at the time, plus three percentage points. The plan would get Congress out of the business of setting arbitrary interest rates, and the CBO estimates that it would actually save the government money (interest rates will likely rise, bringing in more money on student loans in the future). Senators Richard Burr (R-NC) and Tom Coburn (R-OK) liked the CBO/DeLisle proposal so much they introduced it as a bill. It went nowhere, and the congressional kabuki theater continues.
But all this attention to the problem at hand misses the forest for the trees. Solving the interest rate issue is akin to rearranging the deck chairs on the Titanic. It will do nothing to solve the root cause of student debt: the skyrocketing cost of college, which increased over 400 percent between 1982 and 2007 (the median income only increased 150% during this time period). Whether or not student aid “causes” price increases is actually irrelevant. What’s most important is the effect that continued access to easy money has on the incentive to lower the cost of delivery (read: none). Until we find ways to encourage cost containment and fiscal stewardship via federal and state policies, tinkering with the terms of student loans will generate lots of hot air and little long-term help.