For Lenders, the Trouble Begins

Next week, the house will consider a bill to cut interest rates on subsidized Stafford loans in half--to 3.4%--over five years. The cost of these cuts will come close to $6 billion and, under the new ‘PAYGO’ rules, the Democrats are paying for it with cuts in lender subsidies. While some students will benefit from the lower interest rates, this bill is more about freeing-up money from the heavily-subsidized lending industry than it is about making college more affordable.

Making college more affordable will require broader changes in the lending ‘system’ (although our confusing and complicated financial aid system is hardly a system at all), including targeting aid to students who need it most and providing help to students who are struggling to repay their debt. While interest rate subsidies will alleviate debt payments for some, they are poorly targeted, do not encourage colleges to lower costs, and do not take into account students’ post-graduation income levels and ability to repay debt.

This bill does make some important steps forward, however, in how money is allocated in our lending system. Currently, a lot of money is tied up in lender subsidies and payments. This bill starts to chip away at those subsidies and reallocate the money to students. Hopefully, once it's apparent that lenders can survive reduced government subsidies, it will make room for more lender subsidy cuts and more reallocations to financial aid.