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Triage Stafford Loans

Guest post by Saad Asad

It’s an odd world where politicians are pandering to a group who are generally well-off and rarely vote. Yes, I’m talking about college students. Both Mitt Romney and Barack Obama agree that the rate for subsidized Stafford loans should be kept at 3.4% for at least the coming year. Congress even agrees but differ on how to offset the costs (age old fight over spending cuts or tax increases). But college graduates don’t need this extra subsidy, it would be better of funding Pell Grants which are at constant risk.

Before we grow too attached to this entitlement, let’s remember this rate cut literally only came in to existence this year. The rates have gradually come down since the Democrats passed a bill in 2007 to lower them. The CBO, however, estimates that extending them for another year will cost about $6 billion and $45 billion to extend it for ten years.

These loan rates are not retroactive so only those applying in July will be affected by the lapse of this law which would be about 7 million borrowers. Pundits on the left argue this rate hike would be an excessive burden for college graduates, but the fight is over less than $10 a month. Candice Choi of BusinessWeek writes:

“But in general, the White House says keeping the rate at 3.4 percent for another year would save borrowers $1,000 over the life of the loan. That’s assuming a 12-year repayment on a $4,200 loan.

On a monthly basis, a typical payment would go up by about $8, according to FinAid.org”

Critics will argue that as college tuition increases it only makes sense that government assistance also increase. Indeed college tuition has tripled in the past 30 years, but so has the earnings gap between high school graduates and college graduates. Despite this rise in tuition, college degrees continue to pay off. And if they continue to pay off, why should taxpayers continue to subsidize them? Do Harvard graduates really need federal assistance at a time when food stamps and unemployment benefits are at risk?

College graduates are closer to the 1% than the 99%. Only 30% of Americans have a college degree, and even fewer across the world have this credential. They have more political influence and certainly more earning power. George Will of the Washington Post explains:

“The average annual income of high school graduates with no college is $41,288; for college graduates with just a bachelor’s degree it is $71,552. So the one-year difference ($30,264) is more than the average total indebtedness of the two-thirds of students who borrow ($25,250).

Taxpayers, most of whom are not college graduates (the unemployment rate for high school graduates with no college education: 7.9 percent), will pay $6 billion a year to make it slightly easier for some fortunate students to acquire college degrees (the unemployment rate for college graduates: 4 percent).”

Jason Deslisle of the New America Foundation furthers explains how this rate cut only benefits employed high-income college graduates to begin with:

“Subsidized Stafford loans for undergraduates – the only type eligible for the 3.4 percent interest rate – include a special interest-free benefit. The interest clock on these loans is frozen while a borrower is enrolled in school and for up to three years if a borrower is unemployed or meets the rules for economic hardship. This means that keeping the interest rate on newly-issued Subsidized Stafford loans at 3.4 percent will not affect unemployed borrowers. The interest rate for these borrowers is automatically 0.0 percent.

Borrowers working part-time or in low-paying jobs need not worry about the interest rate on Subsidized Stafford loans (for three years) either if they enroll in the income-based repayment plan. This plan caps a borrower’s monthly payment at a share of his disposable income, regardless of the interest rate on the loans. But the deal is even sweeter for Subsidized Stafford loans. If a borrower’s monthly payment is too low to cover the interest that accrues, the government forgives it – up to three years’ worth.

These protections make the rhetoric about lowering interest rates to help college graduates weather a weak job market ill-informed at best. By definition, the campaign to keep interest rates lower on Subsidized Stafford loans is about keeping rates lower only for those borrowers who are employed and earn enough to be ineligible for the income-based repayment program. It is those fully-employed borrowers who are most able to swing the extra $9 a month (at most) that another year of loans offered at a 3.4 percent interest rate would otherwise save them.

Targeting a precious $6 billion right now to borrowers who have jobs and incomes high enough to cover the higher rate seems out of touch, especially when the Pell Grant program needs approximately that much next year to stave off a massive cut to the aid it provides.”

In fact, the Pell Grant was cut by $8 billion last year and another $2 billion this year. Pell Grants increase accessibility while students are in college and directly help low-income families (the threshold is a meager $23000). Simple prioritization tells us to save the grants before we even bother with these loans.

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