End the “In-School Interest Subsidy”?

The Obama administration’s much-discussed Deficit-Reduction Panel isn’t just calling for tax increases and cuts to defense spending and Social Security benefits. Higher education would also face some changes.

According to a piece in the Chronicle of Higher Education, the final report released by the panel says the United States should,

…end the in-school interest subsidy on student loans and eliminate all earmarks. The report also calls for ending most tax expenditures and consolidating “duplicative” programs, including the 105 programs aimed at encouraging students to study science, technology, engineering, and mathematics. However, it also calls for directing some of the plan’s savings to “high-priority investments,” such as “increasing college graduation rates.”

Under the so-called “in-school interest subsidy” policy, the federal government pays the interest on certain federal student loans that borrowers incur while they’re still enrolled in college. College lobbyists generally oppose removing the subsidy (it’s not the first time budgeting advocates have brought up this idea), arguing that it will reduce access to college. As Jason Delisle over at the New America foundation pointed out last month, however:

The in-school interest subsidy is a back-end benefit that borrowers get slowly over the life of their loans – through slightly lower monthly payments. That means it’s not a “college access” program but a loan repayment program.

[Furthermore, while] eligible undergraduate students generally are from lower income families… it’s fair to ask why parental income should have any bearing on how much students should be required to pay each month on their loans 5, 10, or 20 years after leaving college.

The panel’s recommendations alone won’t result in any policy changes but bringing up the possibility of eliminating the subsidy means it could become a point for discussion in coming months.

According to the Chronicle article, all of the cuts proposed would “save $21-billion in 2015.” Removing the interest subsidy alone would save $5 billion a year, according to the Delisle piece.

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