Friday, January 19, 2007

Students hung by PAYGO 

A Democrat platform plank and a first-100-hours legislative agenda item was to reduce interest rates on student loans. Well they did, kinda. The House at least has passed a bill that will cut interest rates in half. The only problem is, it's only halves the interest rate for six months, it's only for loans that already are subsidized, it's only for one kind of student loan, and it won't happen until 2011. The Senate gets the bill next. No current student will feel any gain, as the interest reduction only affects those who pay interest, which means it only helps students after they graduate and are paying back those loans. The bill did not provide the increase in Pell grants that Democrats had originally said they would provide, though Ted Kennedy's bill in the Senate still does at present.

The problem for the House was how to pay the subsidized interest under its new PAYGO rules (or actually the old rules, according to Dick Armey -- WSJ subscriber link.) The subsidies are a $6 billion gift to young college graduates which must be paid by increasing taxes and fees or cutting spending somewhere else. In this case the burden is being paid by lenders who provide students with college financing (if you own Sallie Mae or Nelnet stock, you lost money this week.) Thus the House is reducing the amount of money available to finance incoming freshmen to give a temporary tax break to young college graduates. So which group votes more?

UPDATE 1/20: KT correctly points out that the interest rate falls immediately in increments, but is subject to a sunset in 2012. The rate schedule is
The current rate is 6.8%. And again, it's only for those students who receive subsidized Stafford loans.

A larger point, however, is that setting any credit control that binds interest rates below what the market will bear shifts money out of the controlled market into uncontrolled markets. A bank that might have made subsidized student loans in the past may instead now shift their assets into Treasury bills or business loans.