The student debt debate is heating up just in time for summer. With less than a month to go before a key federal student loan interest rate is set to double, a multitude of legislation calling for more government intervention is popping up in Congress.
The cover on the various proposals may be different – some call for extending the low fixed interest rate on subsidized Stafford loans while others call for pegging all direct loan interest rates to borrowing costs – but the approach is the same: they all tackle the growing student debt burden through targeting interest rates. Proponents of lower interest rates point to the sizeable profit the government makes from student debt, arguing that the government can afford to cut costs for students.
However, an interest rate approach and the accompanying rationale miss the mark. As I recently pointed out, the issue of rising student debt is larger than interest rates. It is a complicated issue with multiple parts that require different responses. And it turns out student loans, especially at subsidized interest rates, may not be as profitable as we think over the long-term.
A new CBO report that proponents of increasing government support for student loans use shows the federal student loan portfolio will turn a $184 billion profit over the next decade. But this commonly cited method of cost accounting, based on the Federal Credit Reform Act, does not include the risk to taxpayers from economic volatility. Fair value accounting, the alternative measure CBO estimates, does. It turns out that under fair value accounting, the CBO estimates the government will incur a $95 billion loss over the next ten years at current interest rates. Moreover, under both accounting measures, the CBO study found that permanently extending the reduced interest rate on subsidized Stafford loans results in a net cost. It turns out the profitability of federal student loans is all in the accounting.
College access and affordability must continue to be the main priority to encourage investment in higher education. Going to college remains the best way to increase one’s economic prospects, and an educated workforce is necessary for a high-growth economy. But we must acknowledge that addressing the rising burden on students through interest rate reduction is only a temporary Band-Aid. Any long-term solution to the student debt burden must address the larger issues: a slow-growth economy and excessive increases in tuition.
