What we’re likely to end up with is what’s called a market-based system, under which the rate on student loans would be tied to the interest rate on ten-year Treasury bonds. (Currently, Congress simply decides what the interest rate will be.) The deal that the Senate appeared ready to accept last week, for instance, would set Stafford rates at the ten-year Treasury rate plus 1.8 per cent, along with a small additional charge to cover administrative costs. (This would mean that students taking out new loans would pay around 4.5 per cent.) The open question is whether, as Democrats insist, there will be a cap that would set interest rates at a maximum of 8.25 per cent. Republicans appeared willing to accept the cap, but then the Congressional Budget Office released an estimate suggesting that it could cost twenty-two billion dollars over ten years. And, since Republicans won’t go along with any plan that could increase the deficit, talks are currently in limbo.
This is an absurd state of affairs. In the first place, the C.B.O. estimate is just that—an estimate. Projecting the losses that a cap might inflict on the government depends on predicting the future course of interest rates, and there’s no reason to think that the C.B.O. has any real idea of what interest rates are going to be five or six years down the road. More important, if a market-based system is put in place, the deficit hawks have already won.
And while tying student-loan rates to Treasury rates makes sense in the long run, for the foreseeable future it’s another example of Washington being penny-wise and pound-foolish. With the economy still weak, inflation nonexistent, and interest rates low, now is not the time for the government to be cutting back on investment or making it harder for Americans to spend and invest. Yet, by raising interest rates on college students, that’s exactly what it’s doing. Members of both parties say that they want more Americans to go to college, and they agree that the U.S. economy will reap the benefits of having more educated and therefore more productive workers. Making college more expensive in a weak economy—which is what a market-based system would do—seems an unlikely way to accomplish these goals.
What the student-loan imbroglio really illustrates is the way that fiscal and monetary policy have been working at cross-purposes for years now. On the one hand, the Federal Reserve has been keeping interest rates low and pumping money into the economy, because it wants individuals and businesses to be less risk-averse and more willing to borrow, invest, and spend. At the same time, the obsession with cutting the deficit means that the federal government has been investing and spending less, and in effect pulling money out of the economy. The Fed chairman, Ben Bernanke, spoke exactly to this point when he testified before Congress yesterday, saying that tight fiscal policy has trimmed the economy’s growth rate this year by a full 1.5 per cent. And that makes the Fed’s job harder.
Unfortunately, there’s little political interest in looser fiscal policy, which explains why the student-loan debate has gone the way it has. We could, as Senate Democrats have proposed, roll rates back to where they were and keep them there for at least another year (by which time, one hopes, the economy will finally gain real steam). That would make kids more willing to go to school, and put more money in their pockets. Instead, we’re going to be asking college students to put more of their income toward interest payments, which will make them less willing to borrow for their education, and will mean that they’ll have less money available to spend on everything else. That’s precisely what you don’t want in a weak economy—yet, as with the sequester, it’s exactly what the preoccupation with the deficit has led to. What the Fed giveth, the rest of the government has been doing its best to take away.
Original Article
Source: newyorker.com
Author: James Surowiecki
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