The Interest Rate Problem

As congressmen (and their opponents) debate the merits of various financial bailouts of the last few years, one opinion piece in the Los Angeles Times considers that it might be time for another bailout, this time for student loans. The piece is a year old, but still actually very timely. David Lazarus wrote:

I’m sympathetic, but only because the government has already shown itself to be a soft touch for banks, insurers, carmakers and especially for homeowners, who in many cases had no business taking out loans they couldn’t repay.

In that context, I think it’s perfectly reasonable for college students and recent grads to seek a little bailout of their own.

The Lazarus plan is not some half-baked scheme for the government to throw money at someone else’s problem. Lazarus only wants the country to get a hold of the interest rates on student loans. As he points out, interest rates on government-backed student loans can range from 6.8 percent to 8.5 percent. Really. This is at a time when the interest rate on a 30-year mortgage is about 5 percent.

Ideally, policymakers should encourage more people to go to college, not less. Now obviously people have only themselves to blame for signing up for unmanageable student debt. But that’s the problem, it’s unmanageable. As Lazarus explains,

The whole idea of a government-subsidized loan is to help fund the sky-high education costs of people who have nowhere else to turn. These are precisely the people who shouldn’t be paying above-market interest rates.

One of the best ways to facilitate college attendance is to make student loans more manageable for students, college graduates, and their families. An 8 percent interest rate? That’s not a way to get more people through college. That’s the sort of thing that would ordinarily be known as loan-sharking.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer