Why the House GOP is wrong on student loans

Patrick Hedger FreedomWorks
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Not letting a good populist crisis go to waste, some Republicans have been quick to hammer their Democratic counterparts in Congress over the recent hike in the student loan interest rate. Last week, the interest rate on federal subsidized student loans doubled from 3.4 percent to 6.8 percent, after a 2007 law suppressing them finally expired.

In typical Washington fashion, this event was played up with all the doomsday fanfare of the fiscal cliff and government shutdowns. As usual, these concerns will prove to be completely overblown.

Since federal student loans are have fixed rates, no one currently paying the 3.4 percent rate will see any increase in their monthly repayment bills. What’s more, these subsidized loans only amount to about a quarter of the federal loans issued every year. Finally, this doubling of the interest rate only means roughly $5 to $10 more per month in payments for students obtaining these loans; devastating news for Chipotle and Starbucks to be sure.

But don’t relax just yet. There is still a crisis here, one almost entirely ignored by both national parties.

Federal student loans are the kind of nonsense we’ve come to expect from progressives and Democrats, who have successfully tied nearly half of all Americans’ financial futures to one federal program or another. But some congressional Republican, inconsistent with the free-market principles they claim to champion, have taken up arms over the rate increase, determined to fix a broken program that should not exist in the first place.

Instead of querying the public on why nothing was done to renew an expiring law, the GOP should be asking this: Where in the Constitution does it say anything about the federal government loaning money to students?

Republicans should be working to abolish the federal student loan program entirely, rather than using it to their perceived political advantage. Federal student loans, which are soon to be the only education loans available (thanks to the Affordable Care Act), severely distort the market and are directly responsible for the surge of under- and unemployed youths with bachelor’s degrees. Currently, about 53.6 percent of those under the age of 25 are underemployed or unemployed entirely.

Since interest rates are effectively the price of money, setting fixed loan rates at cheap levels below the market-clearing level amounts to a price control. Price controls naturally lead to overconsumption, which is exactly what’s happening in today’s colleges.

Students are taking out cheap loans as liberally as colleges spend their tuition. With money readily available at low rates to anyone who asks, students never think twice and colleges have no incentive to keep prices low. The end result is tens of thousands of dollars worth of each student’s tuition being spent by universities on superfluous things designed simply to draw more and more students and their government-backed blank checks.

The overconsumption crisis is even more evident in the college dropout rate. A staggering 46 percent of all students fail to graduate within six years. They are left with all the debt and none of the payoff.

Beyond the campus, the market is flooded with millions of astronomically expensive bachelor’s degrees that are only worth a fraction of what they used to be. The ultimate end result is a lost generation of 20-somethings, saddled with massive debt and no job to begin paying it back.

Yet to the disappointment of fiscal conservatives nationwide, some in the GOP still insist that education loan rates be kept at these dangerously low levels. Congressional Republicans have even floated the idea of tying the student loan interest rate to the Treasury bond rate; which is possibly the only idea that could be worse than the current plan.

Congress must realize that interest rates are an assessment of risk. Despite the recent deficit crisis, it’s hard to imagine the fantasy world where it’s just as safe to lend money to an 18-year-old with only a 54 percent chance of graduating, as it is to a federal government with trillions of dollars in income and liquidable assets.

Let’s not forget: Not everyone’s preferred career choice requires a college education. Operating under the assumption that everyone needs a degree only devalues education at all levels, which is inherently unfair to those in communities where people can barely afford to stay in high school, let alone go to college.

It’s clear that the politicians struggling in the GOP want an “in” with the youth vote. But sacrificing principles for the sake of short-term solutions and student-loan street theatre isn’t exactly the way to do it.

Patrick Hedger is a Policy Analyst for FreedomWorks, a grassroots service center to a community of over 6 million activists who believe in individual liberty and constitutionally-limited government.