Paying off student loans takes a backseat to other expenses when a college graduate is unemployed or underemployed. Ask any barista with a master's degree. The high-interest rates help explain what can be a double-digit student loan default rate, depending on the type of college. Borrowers recognize that wages are flat, inflation low, the interest rate on their loan high and monthly repayment requirements unaffordable, so they give up. Others decide not to go to college in the first place. That has to change.
Needlessly high student loan interest rates unfairly burden young people starting out in life and sometimes determine their career choices. Recognizing that, in 2007 Congress began lowering the federal student loan interest rate in stages from 6.8 percent to 3.4 percent. But students, and prospective students, are once again in danger of becoming collateral damage in the inane budget war being waged by Republicans inalterably opposed to revenue increases. Unless a budget agreement can be reached, the rate will return to 6.8 percent for new borrowers in July. That would increase student loan costs for New Hampshire students, who already graduate with the highest debt level in the nation, by $30 million; the cost for the nation's students and their parents would increase by $6 billion. In a nation that needs to make higher education more affordable, not less, that's madness.
The Republican Party, already perceived of as a bastion of white men who, if they ever needed student loans, paid them off decades ago, will further alienate young voters by raising student loan rates. According to the Congressional Budget Office, the federal government makes a 36-cent profit on every student loan dollar. That figure understates the Treasury's gain from investing in education. The terrible market for graduates notwithstanding, people who further their education, earn more and thus pay far more over a lifetime in income taxes.
One bill has been filed that would keep the 3.4 percent rate in place for two more years, but borrowers would benefit from the security that comes with an interest rate that's fixed for the term of the loan. Another bill would let the rate float with inflation. That's a bad idea. Prospective students who fear that the rate on their loan might balloon with inflation will be far more likely to forgo higher education.
President Obama proposed a plan to charge market rates for federal student loans. That plan has its good points. It would, for example, require that borrowers pay no more than 10 percent of their discretionary income toward the debt. It would also fix the rate for the life of the loan, which is a good thing if the loan is taken out when rates are low, but a terrible idea if borrowing must be done when rates skyrocket.
The need to educate a populace that has no choice but to compete in a global economy is far too important to be held hostage to the overrated need to reduce the federal deficit. The best way to reduce the deficit in the long run is to make America's workforce the best educated, most creative and productive in the world. Making higher education more affordable will do that. The student loan rate should be set at a level no higher than that needed to covers costs and losses from defaults that would diminish if rates were lowered.
We congratulate Sen. Jeanne Shaheen on her humane Pay as You Earn proposal, which would cap student loan repayments at 10 percent of a borrower's discretionary income. It could cut the default rate and move some graduates into careers that they might not have pursued, given the need to make big loan payments. It would help convince people that pursuing higher education is a gamble worth taking, one that doesn't require living in your parents' basement while your loan is repaid.
Anyone who has borrowed for higher education, or may need to, should keep a close eye on their representatives in Congress and be sure to register to vote.