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How cheap loans may hurt students

A surge in financial aid backed by Washington could be pushing tuition through the roof.

By MSN Money Partner Jun 25, 2012 7:15PM

This post comes from Rick Newman at partner site U.S. News & World Report.


U.S. News & World Report on MSN MoneyWashington politicians are congratulating themselves for another giveaway to taxpayers: the looming deal to extend the 3.4% interest rate on subsidized student loans, instead of letting the rate return to its prior level of 6.8%.


Image: US Capitol (© Donovan Reese/Getty Images)This appears to be a rare bipartisan moment, with a significant number of congressional Republicans supporting a move President Barack Obama has been advocating for months. Yet while both parties are clearly seeking to curry favor with young voters in an election year, the move to keep interest rates low may ultimately harm those they're trying to help.


Obama will no doubt repeatedly remind voters that extending the lower rate will save a typical student borrower about $1,000 over a decade. What Obama won't mention is that cheap, widely available loans are probably one of the factors pushing tuition to unaffordable levels, which in turn is leaving many graduates with overwhelming debt loads.


The cost of a college education has been rising by about 9% per year over the past decade, more than three times the overall rate of inflation. One year at a public university now costs more than $15,000; a private school costs about $33,000. For many families, education inflation is more onerous than the skyrocketing cost of health care, since you can't buy insurance that pays for college.


Several factors are pushing tuition costs up, including cutbacks in state funding and an increasing number of students competing for university spots. But another pernicious cause may be a sharp increase in financial aid available to students, especially federally subsidized grants and loans. (Post continues below.)

Over the past decade, for example, the total amount of grants, loans, tax credits and other types of financial aid funded by Washington has risen by 164%, after accounting for inflation, according to the latest data from the College Board. The typical student benefits from more than $10,000 in federal aid each year.


That's a huge commitment to college education, and a seemingly smart way for Washington to prioritize spending. Yet many experts say that all that aid artificially increases demand for a college education and the money available to pay for it, which pushes prices up.


Remember the housing bubble?

There was a disturbing parallel in the housing market a few years ago, when interest rates kept artificially low by the Federal Reserve, along with lax lending standards, generated a flood of money available for mortgages. That helped push home values far above healthy levels, creating the housing bubble that began to burst in 2006, triggering a brutal recession.


Employment at colleges and universities, meanwhile, has increased consistently over the last decade, in sharp contrast to the cutbacks that have occurred throughout the private sector and in state and local government. That suggests that there's little cost pressure forcing universities to become more efficient, as many companies have been forced to do.


Many university administrators, meanwhile, complain of lavish spending on dorms, gymnasiums, student centers and other things that push up college costs without directly improving education.

Student debt has now drifted up to about $22,000 per borrower for graduates of public universities, and $28,000 for grads of private schools. The uptick per student has been modest in recent years, but student debt has become an acute problem because of the shortage of jobs available to new grads. Some economists worry that a wave of defaults could be coming as millions of young workers fail to earn enough income to pay off their loans.


Keeping interest rates low will push monthly loan repayments down by a few bucks per student. Those savings could be negated, however, by even modest increases in tuition. The real way to promote education would be to give schools incentives to cut costs, and pass the savings on to students. But apparently they don't teach that in college.


More on U.S. News & World Report and MSN Money:

Jun 26, 2012 1:27PM
Having worked in university administration for many years I do NOT believe giving the school incentives to cut costs means the savings will be passed on to the students.  I've been amazed at how money finds its way into areas that benefit upper level employees at the expense of students and lower level staff.  Lower interest rates for students is the only way students themselves will benefit.
Jun 26, 2012 2:32PM

Some good old capitalistic competition is what the system needs and I think I have stumbeled onto the answer for rediculously high tuition and even more rediculously high cost of books.  The Free Internet University of America.  Volunteers needed.  HRF

Jun 26, 2012 2:26PM

What this Nation needs is a credible Free Internet University with E Textbooks that is supported by business, government and charitable foundations.  I am going to work on that as a volunteer  for the next few years.  Anyone want to help get the University going.  Lots of volunteer help needed??


Jun 26, 2012 7:22PM
Students need to be told upfront that, UNLIKE ANY OTHER LOAN, you cannot declare bankrupcy on student loans.  This needs to be changed.
Jul 8, 2012 11:59PM
This is exactly what I have been saying...they know people will not just walk away.
Jun 26, 2012 2:50PM

Less help, or no help, for not-wealthy students will not solve the problem. College will continue to get more and more expensive as long as everyone still believes, and rightfully so, that college is the only chance, though now an ever shrinking chance, to obtain gainful employment. With this being the case, people will pay anything, regardless of whether or not there is government assistance, to go to college. Eliminating or reducing government assistance will simply make college, and the chance for gainfully employment, a treat for only the wealthy.


The problems are,


- too many people are going to college. With "everyone" going to college these days, there are more college graduates than there is a need for them in the work force. If there was a shortage of college graduates, pay for people with that level of education would go up and close the gap between the cost of college and what college graduates actually earn.


- pay is too low everywhere. If pay were high enough in all jobs, people who cannot really afford college would no longer not bother trying to go to college. Yes, college-level employment is better, but there would be less reason to throw away one's future to student loan debt if one can make a living without college.


I hate to say it, but Socialism is actually the solution here. If the government were to seize the year-after-year-after-year windfall profits that corporate America is making, even though they claim that we are in a "recession", and distribute a good portion of it every year to employees, that would solve the problem. People who don't go to college will make a living again, and people who do go to college will make enough to pay off student loans. Another plus would be the end of the "recession" because businesses, including corporate America, would make more money as people actually making what they earn will spend that money on food, clothing, machines, housing, etc., that businesses and corporate America sell and make a profit on.


Increasing pay for all workers to what it would be if corporate America had not been artificially depressing wages for three decades, regardless of how this is accomplished, is win-win-win-win for workers, college students and graduates, business and corporations, and the economy and Capitalism over all.

Jun 26, 2012 1:51PM
It all comes down to one thing...are you tired of the rich getting all the bailouts and us working men getting nothing? Take a look at what I found and see why the rich are trying to hide this for themselves. G00GLE the term ' FAST STOCK BUDGET ' all one term and click the first site. Go right to the 'PENNY STOCK' page to see what the rich don't want you to know. It is time your family lives the good life and this will help. THIS IS AMAZING!!! THIS IS A MUSSSST SEEE!!!
interest rates low will push monthly loan repayments down by a few bucks per student. Those savings could be negated, however, by even modest increases in tuition. The real way to promote education would be to give schools incentives to cut costs, and pass the savings on to students. But apparently
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