Federal Student Loan Sharks

| 10/21/2013 9:18:00 AM

Occupy Student Debt
The government is profiting off of young adults across the nation, and the new law on student loan rates only makes things worse.

This article originally appeared at The American Scholar.

Education, Thomas Jefferson believed, should be free. Its universal availability was at the center of his vision for the republic. In the wake of the Constitution’s drafting in Philadelphia, he remarked in a letter to James Madison, “Above all things I hope the education of the common people will be attended to, convinced that on their good sense we may rely with the most security for the preservation of a due degree of liberty.” In 1778, Jefferson proposed to the Virginia legislature a bill for the “More General Diffusion of Knowledge.” The bill’s preamble reads, “those entrusted with power,” in all forms of government, “have perverted it into tyranny,” and “the most effectual means of preventing this would be to illuminate, as far as practicable, the minds of the people at large.” When Jefferson thought about the nation’s education system, writes Merrill D. Peterson in Thomas Jefferson and the New Nation (1970), he “projected three distinct grades of education—elementary, middle, and higher—the whole rising like a pyramid from the local communities.” Elementary schools would freely educate all children in reading, writing, and other basics. The middle and higher schools would be selective and charge tuition, except for poor students who passed rigorous examinations and received state scholarships. From its opening in 1825 until 1860, Jefferson’s University of Virginia charged a tuition of $75 per session.

Perhaps it won’t surprise you to hear that we have very few Jeffersons in the 113th United States Congress, but then we don’t have any in the White House or the Department of Education. Congress spent the summer bickering over whether the rates for student loans for higher education would double on July 1, from 3.4 to 6.8 percent. They did double through congressional inaction; but at the end of July, Congress passed a Senate compromise that fixes rates annually to the 10-year U.S. Treasury note plus 2.05 percent, capped at 8.25 percent. This year’s rate will be 3.9 percent for undergraduates and 5.4 percent for graduate students, who have traditionally paid a higher rate. In the press, the new bill was hailed for decreasing rates and saving students significant amounts in interest. But of course the bill actually increases rates by half a percentage point from what it had been before July 1. The federal government is in effect levying a new tax on college students in a program that already raises an obscene amount of money for the Treasury and is jeopardizing the financial future of a whole generation of young Americans. Our third president, it’s fair to say, would be disappointed if not disgusted.

In his 2010 State of the Union address, our 44th and current president proposed to “finally end the unwarranted taxpayer subsidies that go to banks for student loans.” We all agree with that; but what should we have done next? For starters, the government could have stopped being so greedy and instead made direct loans to students at its cost. With the current cost of funding at 0.7 percent, that approach would have put student loans at around one percent. President Obama apparently never considered that course—by continuing the same high rates, the same high profits go to the government instead of to the banks.

7/23/2014 7:25:28 PM

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