Do not double student loan rates

All education financing systems try to solve the same problem: students need education before they can make the money necessary to finance it. The natural solution to that problem is to let students get the education first and then pay for it later. This is true of college education just as much as it is true for K-12 education. Kids in first grade cannot work to make the income necessary to pay for their schooling. So we allow them to go to school now and pay for it later. Because K-12 education is universal, paying for it later just entails paying taxes later in life. College education is not universal and so complications arise.

It does not seem fair to use universal tax schemes to finance college education. Such schemes involve taxing money from those who do not receive college educations in order to pay for those who do, even though the latter are generally much better off. We could avoid this problem by imposing a tax scheme only on those who receive college educations, and I have advocated such a system in the past. Short of that, only personalized debt schemes will solve the financing problem without introducing fairness problems.

This is basically the scheme the U.S. has now. Students take out personal loans to acquire education and then pay them back later. The point of using loans to solve the financing problem is not to maximize returns to creditors; it is to allow future productivity to pay for present education. The federal government has set student loan interest rates at 3.4%, a rate which delivers returns of almost 14 cents on every dollar. As Konczal points out, the federal government actually made a handsome $37 billion in profits off student loans this year even at the current rate.

Against that backdrop, it seems obvious that doubling student interest rates to 6.8% — something Congress may allow soon — makes no sense. The problem of matching future production with current education consumption without burdening those who do not receive college education has already been solved, even if imperfectly. If anything, it seems like we could afford to decrease the student loan rates.