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Here it comes again, the “great sell out” of American students.
The Senate has arrived, once again, to “save” college students by extending artificially cheap interest rates to them. Politicians warn that without passing legislation, students are going to face major cost increases. Couched as the moral, right, and compassionate thing to do, the legislation they’ve cooked up is merely a cover for selling out our students.
After failing to pass a student loan bill earlier this month which would have prevented interest rates from doubling on certain subsidized student loans, the Senate is ready for take two. This week, the Senate will vote on a bipartisan compromise on student loans that combines elements of both Republican and Democrat plans. It would tie student loans to the interest rates of the ten-year Treasury bill with the addition of 2.05%. This would supposedly allow the interest rates to fluctuate with the market, instead of the fixed rate previous used. Nevertheless, interest rates would not be allowed to go higher than 8.25% and students would continue to borrow at the low rate of 3.85% in the fall.
For starters, inaction amounts to the difference of a couple beers or frappuccinos a month in expense. But, lowering interest rates will mean billions to taxpayers. In addition, the interest rate increases will only apply to certain loans in the future (about a quarter of all).
The fundamental problem is that, despite claims to the contrary, tying interest rates to the Treasury-bill will mean arbitrary distortion. T-bills are already heavily distorted by the Federal Reserve and therefore student loans will not truly fluctuate with the market. This is especially true since rates are capped. Setting interest rates so low presumes students have the credit they don’t have and encourages poor decision making. This bill only passes manipulation of rates under the guise of “free market principles.”
Artificially manipulating interest rates encourages students to make choices that are usually not in their best interest. In this case, students are encouraged to go into more expensive education programs as well as purchase superfluous education amenities that they otherwise would not buy. Cost cutting for both students and universities is severely reduced. Thus, the spiraling cost of tuition and student debt. Yet, now that we have encouraged students to get degrees and pile on the debt, they are graduating with few job opportunities. Most jobs they end up in don’t even require degrees. Well, great.
This presents another problem caused by government manipulation: credential inflation. Because the government makes it easier for all to have degrees, each degree means less. Today, it seems like a degree is a prerequisite for jobs that before didn’t even require one. After all, most have one. Combined with a poor economy, you see overqualified individuals in low paying, part-time jobs.
If politicians would stop the mantra that government is necessary, they would see this is hurting students, not helping them. The truly compassionate thing to do would be to get the government out of the business of student loans. This would incentivize better choices, lower tuition costs, reduce credential inflation, and leave students better off on graduation day.
Still, the mantra continues…
And we still continue to sell out our students.
To find out more read, “Doubling of Student Loan Interest Rates Not What It Appears”