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Economics 101: The truth about college loans

April 29. 2012 7:28PM

Nothing is more popular than free money. Federally subsidized college loans seem free, until the bills must be paid.

Barack Obama is less worried about the taxpayers of all ages who someday will face those bills than he is about his own re-election, which will be unlikely if young voters do not rally to his cause. That is why the President campaigned at campuses across the country last week, pushing a plan he insists will keep college affordable and within reach for all Americans.

But there is one small problem. It won't, because it does nothing to control current debts and future tuition increases.

That economic reality didn't stop his loyal ally in New Hampshire's 2nd District, Democratic congressional hopeful Ann McLane Kuster, from echoing the White House's talking points. 'If student loan rates double, it would have a huge impact on New Hampshire students and the economy,' she warned.

But just how massive will this crushing burden be? According to the White House itself, the 'huge impact' actually averages just $1,000 per student. Not per year. In total. And not a penny comes due while a student is in college. The interest rate is zero until after graduation.

A thousand dollars isn't petty cash. But will bright 17-year-olds settle for a cheap, second-rate school because a reduced federal subsidy means they must pay a few extra bucks per month in interest several years down the road? Probably not.

Many students are indeed seeking options to overpriced schools. But their financial concerns are caused by the unjustifiable, soaring cost of tuition, room, board and other fees, not by this interest charge, which remains far lower than real-world rates. The average college-bound senior now expects to be $25,000 in hock after graduation. The real problem is the debt itself, not the finance rate on the loan.

That is not simply a conservative analysis. The liberal Brookings Institution recently debunked the big spenders' alarmist rhetoric. It reported that '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. 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.'

But political rhetoric almost always trumps rational economic analysis. That applies to Republicans, too. In February, Mitt Romney argued that market competition, not federal subsidies, could keep education costs in check. He advised students to avoid the highest-priced schools in favor of 'one that has a little lower price where you can get a good education ... and don't take on too much debt, and don't expect the government to forgive the debt that you take on.' But Romney now endorses an extension of the low rates.

At some point, America must accept financial reality, confront the higher education establishment and curb its spending. Our failure to do so has now given us a generation that carries an unprecedented burden of debt. One more well-intentioned tweak to student loan interest rates may buy a few votes, but it will worsen the problem.

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