Obama and Romney both wrong on student loan interest rates

Guest blogger Matthew M. Chingos is a fellow at the Brookings Institution’s Brown Center on Education Policy. A version of this post originally appeared on the Up Front blog.

After months of the presidential candidates paying minimal attention to education, the interest rates on federal student loans emerged as a hot-button political issue this week. These loans play a crucial role in ensuring meaningful post-secondary opportunities for American students, both at Career and Technical Education (CTE) programs and four-year institutions, which is why it’s disconcerting to see both Barack Obama and Mitt Romney present proposals on this issue that may be good politics but are bad policy.

This week President Obama is heavily promoting his plan to keep the interest rate on one type of student loan in particular—new subsidized federal loans—at 3.4 percent. The rate will revert to 6.8 percent in July if Congress does not extend the temporary rate reduction that was enacted in 2007. Federal loans like these are an important source of financial support for community college students, a group Obama has portrayed as a priority for his administration. In 2007-08, 20 percent of full-time community college students received loans from the federal government, up from 12 percent in 1999-2000. This number has likely increased during the economic downturn of the last few years. At for-profit two-year colleges, 94 percent of students received federal loans in 2007-08.

Obama’s proposal is likely to garner support from college-age voters as well as former college students—both graduates and dropouts—currently paying off their student loans. But the latter group may not know that the interest rate on their federal loans will not be affected by Obama’s proposal because it only applies to new loans.

Even presumptive Republican presidential nominee Mitt Romney appears to be confused on this issue, or at least willing to capitalize on this confusion in order to woo young voters. In announcing his support for extending the interest-rate reduction, Romney said “particularly with the number of college graduates that can’t find work or that can only find work well beneath their skill level, I fully support the effort to extend the low interest rate on student loans.” President Obama has also alluded to the short-term needs of students, asking a University of North Carolina audience yesterday “Anybody here can afford to pay an extra $1,000 right now?”

But the type of loans affected by the president’s proposal—new subsidized loans—do not accumulate interest until after students leave college. So a student struggling to afford college would not get any relief now—they would just face somewhat lower loan payments down the road.

There is no doubt that many college students and their families are being squeezed by rising college costs.

There is no doubt that many college students and their families are being squeezed by rising college costs. And there are good reasons for the federal government to provide financial assistance to help low-income students afford college. But charging below-market interest rates on student loans is an inefficient and likely ineffective way to encourage college enrollment and completion because students don’t pay any interest until after they leave college.

Some degree of pandering to various groups of voters is to be expected in any presidential election year. But President Obama could focus his pitch to college students on his other, more significant proposals aimed at reducing college costs. In particular, the president’s proposal to provide prospective college students with much better information about institutions of higher learning—including their graduation rates and the earnings of their graduates—has the potential to force colleges to compete on quality and price rather than on amenities that drive up costs.

Even if this “College Scorecard” proposal can help drive down costs in the long run, it surely does not have the same appeal to voters as promising more money in their pockets right now. But if Obama and Romney want to buy the votes of struggling college students, they should at least propose the more efficient path of increasing the grants that students receive when they attend college, not decreasing the interest they pay after they leave.

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