Keeping rates down on a fraction of student loans won't do anything to solve the college affordability crisis.
Thanks in part to President Obama's surreal slow jam with Jimmy Fallon, student debt has become America's public policy conversation topic of the week. The White House wants to keep interest rates on some education loans from doubling this summer. Republicans also support keeping rates low, but want to pay for it differently. Now the two sides are skirmishing. Cut this. Tax that. Etc.
Inane politics aside, what's frustrating about this issue is how little it matters in the scheme of college affordability. Yes, a few million students might have to pay more on their college debt if Congress doesn't act. Given the state of the economy, and how particularly unkind it has been to young graduates, it's probably worth it to give students a break, at least for another year. But whether or not it happens, this is a sideshow, a distraction from the deeply ingrained problems influencing college costs.
Just how irrelevant is this issue to the price of an education? The New America Foundation's Jason Delisle has a great, short rundown that should give you some perspective, but here's an even shorter version: In July, the interest rate on newly issued subsidized Stafford loans, which make up about one-third of all student debt, is set to double from 3.4 percent to 6.8 percent. They've only been at that rock-bottom rate for one year. By one estimate, the higher rate would cost the average borrower $1,800 more over ten years. Delisle calculates that, at most, borrowers would have to pay an extra $9 a month.
These are not the sorts of numbers that will make or break a student's decision to go to college, nor would they vastly impact a graduate's finances. Of course, keeping rates lower for one year, as Obama has proposed, would cost about $6 billion. It wouldn't exactly be a budget buster.
Or any kind of solution to college affordability.
Here, in a nutshell, are the reasons why the cost of public higher education is rising.* It begins with state funding, which, on an inflation adjusted, per-student basis, has been eroding for twenty-five years. The trend is captured in this graph below from the college board, which shows state and local spending in blue, tuition in green, and enrollment as the pink line. Notice: the green bars grow as the blue bars shrink.
Even if you ignore per-student data, and just look at the absolute level of funding, states are still spending less on higher-ed than they were ten years ago, despite dramatic increases in enrollment. If colleges could easily make themselves more efficient, this might not be a problem. But it's proven extremely difficult to create productivity gains in education, even with the help of modern information technology. So instead, tuition has increased. The federal government has responded by expanding grant aid and the availability of student loans. Sadly, this may have just encouraged some colleges to increase their tuition further, rather than focus on cutting costs. We don't know how severe this problem really is; researchers have reached mixed, often contradictory conclusions. But overall the literature suggests it might be real.