The interest rate “crisis” is heating up again, so now is a good time to revisit the last time this played out (last summer). To refresh your memory, a 2007 law gradually reduced the interest rates on some student loans to 3.4 percent by 2011-12. But rates were scheduled to return to 6.8 percent last summer. The “crisis” began in late April 2012, as proposals to keep rates low began to emerge, and was resolved by late June 2012.
Last summer’s interest rate “crisis” was a real eye-opener for me. Regardless of political orientation, financial aid analysts regarded the ultimately successful effort to keep interest rates at 3.4 percent as ill-advised; and yet just about everyone else portrayed the issue as a “crisis” (and continue to do so) that politicians “saved” us from.
There was certainly no shortage of folks advocating for keeping rates at 3.4 percent. But advocacy shouldn’t be confused with wisdom. I have yet to find anyone of any political persuasion who actually studies financial aid (as opposed to advocating for it) and who supported the effort to keep rates at 3.4 percent. For example, Jason Delisle (and here and here), Matthew Chingos, and Rick Hess cover just about the entire political spectrum. (They are at New America, Brookings, and AEI, respectively.) And yet they all opposed efforts to keep interest rates at 3.4 percent.
There were plenty of news stories on the various proposals, but missing from virtually all of them was any context. There was no discussion of what interest rates should be and why; if the government is/should be making money on student loans; what the optimal rate is in light of social benefits from higher education; or whether subsidizing interest rates is the best use of increasingly scarce financial aid dollars. Any of these would have provided readers with some context to evaluate the various proposals. But we didn’t get any of that, and as a result, the various proposals all took it for granted that rates needed to stay at 3.4 percent and were evaluated on Pavlovian political affiliation.
Now that there is no longer a presidential election to complicate things, perhaps we will get a better debate this year. It is already looking that way too—with sensible proposals from President Obama and House Republicans.
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