Cutting Student Loan Rates Would Be Costly
Making college more affordable was one of a half-dozen items in congressional Democrats' "Six for '06" campaign agenda. The goal, as it was succinctly put in the House Democrats' official policy document before the election: "Make college tuition deductible from taxes, permanently. Cut student loan interest rates. Expand Pell Grants."
What might such proposals cost? Although the Congressional Budget Office has not analyzed the potential costs of any of these initiatives, analyst Jaret Seiberg of Stanford Washington Policy Research has taken a preliminary crack at it: "Based on what we heard, we believe the interest rate cut would cost $18 billion over five years," he wrote in a recent report. "If one adds in an extended tuition tax break and higher Pell Grants, then estimates quickly climb to as high as $60 billion over five years. To pay for this, Democrats would need to find $60 billion of revenue raisers and spending cuts."
Seiberg adds that Democrats might look to consumer lenders for some financial aid of their own. Private lenders receive interest rate subsidies and federal loan guarantees that can nearly eliminate their risk if borrowers default. That federal dough is certainly a tempting target. "I think there is a question whether resources that go to excess subsidies to student loan providers should instead go to students through lower rates, increased grants, and other forms of financial aid," says Michael Dannenberg, director of the Education Policy Program at the New America Foundation. (He is also the author of the think tank's Higher Ed Watch blog.) Even the Bush administration has used the term "excess subsidies" when referring to the programs in its most recent budget.
Yet an analysis by Prudential Securities found that if Democrats voted to eliminate the entire Federal Family Education Loan Program–the federal program under which private student lenders like Sallie Mae operate–it "would fail to produce enough savings to ... cut student loan interest rates [from 6.8 percent to 3.4 percent], raise the Pells, and create a new $3,000 tax credit for college tuition costs."
Making things tougher for Democrats is their support of a return to budget rules that would require all new spending to be offset by spending cuts or higher taxes. In the past, Republicans have argued that by increasing financial aid, Democrats were just going back to their old "tax and spend" ways. This time around, Dannenberg expects the Democrats to counter with a message of "students, not banks" to emphasize their spin on funding priorities. In a counter-countermove, Dannenberg expects Republicans to yell "tuition, not interest rates" to focus attention on rapidly rising college costs. That would be in line with an unsuccessful Republican proposal from 2004, the Affordability in Higher Education Act. The bill would have given the government the option of removing direct subsidies to colleges and universities that repeatedly engaged in exorbitant tuition hikes. One possible compromise, Dannenberg suggests: Simply combine the Democratic plan with the Republican one, since they don't conflict.