Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, June 1, 1995 TAG: 9506010045
SECTION: EDITORIAL PAGE: A-9 EDITION: METRO
SOURCE: JAMES K. GLASSMAN
DATELINE: LENGTH: Long
That's unfair, House members concluded early last month, so they agreed in their budget to change the lending rules, saving about $19 billion over seven years. But this past Thursday, the Senate added most of the money back. It was a demonstration of just how difficult it will be to trim any program with a strong constituency and an emotional appeal.
Don't get me wrong. Lending money to students to attend college - or to get any kind of post-secondary education - is a good cause that requires government help. The question is how much.
In 1993-94, about $30 billion in financial aid was distributed through federal programs. Most of the money went to about 5 million students through Stafford Loans, which are subsidized in two major ways:
First, the government guarantees banks making the loans that they'll be paid back - even if students default, which they do with shocking frequency.
Earlier this month, Dennis Zimmerman and Barbara Miles of the Congressional Research Service calculated that if banks did not receive a federal guarantee and instead had to charge enough interest to cover likely defaults, then the rate on a student loan would be 16 percent instead of 9 percent. Because $80 billion in loans are outstanding, that's a subsidy of about $6 billion a year.
This government subsidy may be costly, but it's necessary. Without a federal guarantee, banks simply would not make college loans at any price to millions of families, and the nation would suffer.
But most Stafford loans provide a second, more pernicious subsidy: Students don't have to pay interest on their loans while they're in college, graduate school or even trade school. (Forbes magazine reports ``taxpayers stand behind more than $725 million in annual loans to students at beauty schools.'')
The House thought it only fair to make the borrowers themselves pay this ``in-school'' interest over time (10 years on average), beginning six months after they graduate.
For a student who borrows the maximum $17,125 over four years, monthly payments would rise from $208 to $252. That's hardly onerous - an additional $44 a month for someone who, according to the Labor Department, will make roughly $2,000 a month more than a high school graduate.
The current subsidies, however, have strong support from universities, banks and, of course, students. Politicians know an issue with punch when they see one. President Clinton said the changes pushed by House Republicans amount to ``the biggest cut in student financial aid in the history of the United States. ... It is wrong, it is wrong, and we should not stand for it.''
But the battle over subsidies obscures the most important problem facing higher education: It's too expensive. Tuitions are increasing at three to four times the rate of inflation - a growth far more explosive than health care.
In 1980, it cost $6,000 to attend the average four-year private college; in 1993, it cost $19,000. If, over this period, education expenses had risen at the same rate as the Consumer Price Index, the cost of private college in 1993 would have been $11,000.
In other words, students are paying an extra $8,000 a year because university administrators can't hold down their costs the way other managers can. Government loan subsidies themselves probably account for much of the failure. Even a staunch advocate of student loans like Daniel Cheever, former president of Wheelock College in Boston, acknowledges this adverse side-effect: ``As long as the money is available, there's no incentive to hold down prices.''
``Our costs are too high, and our prices are too high.'' John H. McArthur, dean of the Harvard Business School, said recently, speaking of higher education in general.
The truth is that American families would benefit far more from cost control at universities than they benefit from government-backed loans. Instead, Washington is stuck on ideas that make higher education more and more expensive - both for those who go to college and those who don't. Like Medicare, the loan program is a middle-class entitlement without annual spending caps. And it's growing like crazy. Loans outstanding are expected to double in five years.
The Clinton administration's only attempt to rein in costs is its ``direct lending'' program, by which the government now makes 40 percent of student loans itself, bypassing banks.
But, as Zimmerman and Miles of the CRS point out in an article in the National Tax Journal, savings from direct lending are ``illusory'' - the result of budget scorekeeping quirks. They also predict that the costs of servicing loans will rise because they'll be handled by ``an inefficient Department of Education.''
That's why the modest step in the House budget is so important. Graduates who benefit from federal loans should, at the very least, pay the interest they incur while they're in college. The burden shouldn't be shifted to struggling American workers who may not even have finished high school.
James K. Glassman writes on financial affairs for The Washington Post.
- The Washington Post
by CNB