By Rachel Brody |
Yes, but with reservations. None of the proposed solutions — not the Republicans' plans to tie the interest rate to the Treasury 10-year rate, nor the Democrats' plan to extend the current rate of 3.4 percent for two more years, nor letting the rate jump to 6.8 percent — adequately addresses the issues surrounding student loans.
All of them fail to perform one of the essential functions of interest rates in lending: to properly assess the risk of non-repayment. The way to do that is to end government control over student loans and let private lenders lend according to students' likelihood to repay.
That might sound harsh, but consider what that assessment does for potential borrowers: it signals their likelihood to complete college and get a good job upon graduation. If lenders are skeptical about a student's chances and offer only higher rates, then maybe that student will think twice before incurring lots of debt.
Student debt is crushing members of the new generation. The old assumption that going to college guarantees success is obsolete; roughly one-third of college graduates work in jobs that require no degree; for recent grads, it's more like 50 percent. Plus, nearly half of those who start college drop out.
Higher interest rates would cause some to reconsider signing away their futures before spending several years discovering that they don't like college, or before they find that their incomes after graduation don't let them live independently while repaying. Better options exist for young people who are not academically inclined.
The 3.4 percent and 6.8 percent loan rates are essentially arbitrary numbers that say nothing about the potential lack of returns to a college education. The Republicans' plans are only slightly better: they may be tied to a market rate, but one that is based on political decisions and overall confidence in the economy, not on students' chances for collegiate and post-collegiate success.
The low 3.4 percent rate gives one very loud signal: it tells young people to max out on student loans, no matter what kind of student they are. Right now, there is over $1 trillion of outstanding student debt, with 13.4 percent of borrowers falling into arrears within three years. Letting student interest rates rise to 6.8 percent may not be the worst policy, at least until Congress realizes that interest rates should be aligned with reality.
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About Jay Schalin Higher Education Writer at the John William Pope Center for Higher Education Policy
Debbie Wasserman Schultz Chair of the Democratic National Committee