The Debate Over Student Loan Interest Is Nothing but a Sideshow

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Keeping rates down on a fraction of student loans won't do anything to solve the college affordability crisis.

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Occupy Wall Street protesters wear signs representing their student debt. Reuters

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. 

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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.

So states are cutting funding. Schools are hiking tuition. And the federal government is trying to clean the situation up with loan money, which may, in some cases, actually be making the problem worse.

This is not a sustainable state of affairs, especially when you consider that, after a point, loans don't actually make college more affordable. They defer the cost until the student can start earning a living. But if the debt begins to outweigh their income gains, the bargain falls apart, no matter how low the interest rate might be. 

If you believe that the country's economic future relies on our ability to produce educated, skilled workers, this counts as a crisis. 

Fixing college affordability means starting at the base of the problem. It means finding a way to stabilize state spending and convincing colleges to try radical new approaches to teaching that can educate more students per dollar. Earlier this year, the Obama administration released a handful of proposals that sought to do just that, but the money involved was frankly far too small, and we've barely heard a peep about them since. Rather, we're hearing about a 3.4 percent interest rate hike on a subset of new loans.

Could the federal government just throw more money at the problem? It's possible. Washington already spends more than $70 billion on tax benefits and grant aid, on top of the $110 billion is lays out for loans. Meanwhile, public colleges and universities, which educate 75 percent of American undergrads, collected $56 billion in tuition in FY 2012, according to the College Board. I'm not an expert on what the budget implications would be, but I imagine that re-routing some amount of grant money towards large, direct subsidies for university systems, then tying the money to keeping costs down and state funding even, might actually begin to reverse this problem.  

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This much is for sure: Keeping the price of borrowed money a bit lower for one more year won't heal our broken college financing system. It's not even a bandage. It's more like giving some comforting words to a critically injured patient. 

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*Private schools generally operate by a different set of economic rules. So please, if you feel compelled to start going on about Harvard hoarding money in its endowment and jacking up costs (which is itself an oversimplification) please pick another comment thread. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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