Taxpayers on the Hook as Interest Rate Cut Drives Tuition Up

About Brian Darling:

Brian Darling is senior fellow for government studies at the Heritage Foundation.

Student loan borrowers have benefitted from a temporary interest-rate reduction on subsidized student loans for three years. Extending this "temporary" program will cost taxpayers $6 billion a year, according to the Congressional Budget Office. It will also cause more inflation in the cost of higher education.

Remember, Stafford loans are issued by the federal government with the backing of the taxpayer. Taxpayers will subsidize any reduction in loan rates. According to the AP, taxpayers are on the hook for about $870 billion in outstanding loans, but many put the figure at more than $1 trillion.

[See a collection of political cartoons on the economy.]

The Obama administration helped get us into this mess. It used legislation to take over all student loans as a means to pay for elements of Obamacare. About $9 billion was used in education savings as an accounting gimmick to pay for Obamacare in 2010. Now Americans are paying a high price for that little trick.

Unemployment has disproportionally hammered recent college graduates. As Mitt Romney has pointed out, over 50 percent of recent graduates are unemployed or underemployed. Sounds like a risky proposition for taxpayers to invest $6 billion next year for kids who can't pay back the loans.

According to Brad Plumer of the Washington Post, citing figures from the College Board, "In the past year alone, tuition for four-year public universities rose 8.3 percent for in-state students and 5.7 percent for out-of-state students. Some of those hikes are likely due to state budget cutbacks, but the same thing occurred with private colleges—a 4.5 percent tuition increase in the past year." This idea will cause tuitions to go up even further.

[Read House Votes to Maintain Low Student Loan Interest Rates.]

Institutions of higher education already receive state and federal monies for tuition, including Pell grants and tax credits, and the federal government gives grants to schools for research projects. All of this taxpayer money flowing to higher education increases costs because there is no market mechanism to keep tuition costs low.

If Republicans and Democrats in Congress hold hands to pass legislation allowing the rate to stay at the arbitrarily low 3.4 percent, expect tuition to continue to climb—and the taxpayer to continue to pay.

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