EagleTribune.com, North Andover, MA

July 7, 2013

Editorial: Cutting interest rate won't solve college loan crisis


The Eagle-Tribune

---- — There has been much handwringing over Congress’ failure last week to prevent the interest rate from doubling on Stafford college loans.

“Shame! Shame!” cry those who see Washington as the answer to all our ills and who cannot fathom why the great and all powerful Congress failed to “act” to prevent this catastrophe.

Well, OK. Maybe Congress should have pressed the “Pause” button on interest rates until it figured out what to do about soaring college costs. It had multiple opportunities to do so.

But the reality is that Washington got us into this mess to begin with. And Washington is much more likely to make things worse than to get us out of the mess.

Congress has only two gears: Do something, anything, even if it’s the wrong thing. Or do nothing, which is what it did last week.

The interest rate on the Stafford loans was due to rise automatically from 3.4 to 6.8 percent on July 1 unless Congress voted to continue the lower rate. Congress didn’t, and the rate rose on new Stafford loans. That will cost typical student borrowers an extra $2,600 in interest on their loans, according to one congressional committee’s estimate.

Massachusetts Sen. Elizabeth Warren and 6th District Congressman John Tierney, among others, say the solution, or part of it, is to lower the interest rate even more. Warren’s proposal is to let students borrow at the same rate as banks do from the Federal Reserve on short-term loans -- less than 1 percent. There are several problems with that idea -- student don’t have the collateral that banks do and their borrowing is long-term, for example.

But the real issue is that focusing on the interest rate ignores the root problem.

The real problem isn’t the interest rate, it’s that students are forced to borrow so much money because of the high cost of a college degree.

Higher education has become higher-and-higher education as tuition, fees and other costs have outstripped the rate of inflation by better than 2-1.

Congress has only fueled the fire by giving it more oxygen -- cheaper and more readily available loans and grants.

As more money becomes available, colleges raise prices to suck it up.

The average student carries a debt of almost $30,000 into the working world. Some owe six figures.

The collective debt has become a colossal drag on the economy and on the lives of young people. Many can’t afford cars or homes. Disposable income? Sorry, I owe my soul to the college store.

So what can be done?

Pressure must be brought to bear on “Big Education” to drive down prices and, thus, student debt.

One way to do that, suggests Glenn Reynolds, author of “The Higher Education Bubble,” University of Tennessee law professor and influential blogger at “Instapundit,” is to make colleges partly responsible when their graduates can’t repay their loans because they haven’t been equipped to find decent jobs.

“I would favor allowing students who can’t pay to discharge their loan balances in bankruptcy after a reasonable time — say, five to seven years, maybe even 10 — with the institutions that got the money being liable to the guarantors (i.e., the taxpayers) for, say, 10% or 20% of the balance,” Reynolds wrote in a recent Wall Street Journal column that also made the point that it’s not so much the interest it’s “the principal of the thing.”

We like the idea.

Ultimately, however, students and parents can bring even more pressure to bear on colleges by asking critical questions before incurring debt that will follow the students long into adulthood.

Is a degree from this school really worth $40,000 or $50,000 a year? Can it get me a job that will pay enough to repay the loan?

The questioning has already begun.

More students are choosing community college, online education or other options that will open a path toward a debt-free life and a career that will support themselves and a family.

Those decisions will ultimately force colleges to examine their costs and take steps to restrain or even cut those costs.

In the end, market forces will decide what is the right price point for a college degree, as long as Congress gets out of the way.

In the meantime, students and parents weighing the value of a degree against its cost should heed that ancient market principal, “Caveat emptor.”

Let the buyer beware.

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