Quelling the Arguments against Student Loan Interest Rate Reduction

While I was reading through some of the articles for yesterday’s post about the House of Representatives bill reducing the interest rate on student loan, I came across several arguments against the bill. I am not a "politically active" person and don’t really care about the partisan debate. But, being a new grad, I know what a relief this bill can bring to the students who qualify for it. So, I decided to research this some more and write a post to quell some of the arguments.

I think one of the main reasons for arguing against the bill is the ignorance of the details. Over the period of next five years, the interest rate reduction will cost the government 5.9 billion dollars. More often than not, the government just passes the buck to the Joe Shmoe Tax Payer. People who do not directly benefit from the interest cut, are worried that their tax dollars will be spent to pay for the someone else’s student loans. But, this is not the case with this bill. It has been crafted beautifully, to benefit students at the cost of banks. The bill proposes to pay for the interest cuts by reducing the profits made by private lending institutions; not with tax payer’s money! So, unless your are highly-paid executive working for Sallie Mae, you have nothing to worry about!

One of the other arguments listed in this article of Higher Ed Watch Blog is that if the government reduces the benefits lenders can make off of student loans, the lenders will reduce the borrower benefits, thus eventually passing the burden back to the students. The spokesperson for the Sallie Mae foundation has already issued statements to this effect! But as the Higher Ed Watch Blog points out, the current "borrower benefits" by Sallie Mae have so many constraints on borrowers that in reality it actually works out to less than one fourth of one percentage point! In addition, the student loan industry is a highly profitable venture, and competition will force the lenders from taking any dramatic measures. So, while the big lenders may rant and rave against this bill, they cannot really harm the borrowers much.

Also, as pointed by this article of Higher Ed Watch Blog, some argue that the real obstacle to affordable education is not the interest rates, but the sharp increase in tuition. I think this point is very valid. Something must be done to prevent the tuition from growing so much faster than inflation. But that does not preclude that the interest rate reduction will make education a little more affordable for at least a few students! I don’t recollect who said it, but don’t throw away the good, in search of the perfect! Sidenote: the Higher Ed Watch Blog also has an interesting article about making college affordable, which provides nice insight into the process of policy making on these issues.

Finally, some argue that increasing Pell Grants will be more beneficial than reducing interest rates. Again, I agree that increasing Pell Grants will be beneficial (provided its not taken out of tax payer money), but that has to happen in conjunction with reduction in interest rates. Pell Grants are not loans; they are no-strings-attached grants. As such only the most-needy qualify. Reduction in interest rates will benefit the middle class students far more.

I am not an expert on this topic (or anything else written on this blog for that matter!). I have posted here what I understand based on a lot of reading in this matter over the past few days. I am definitely interested in listening to different perspectives. Feel free to drop a comment!

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