In the long list of potential cuts put forth this month by the leaders of the president’s deficit-reduction commission is a proposal that college lobbyists have defeated several times before: ending the interest subsidy paid on certain federal student loans while the borrowers are in college.
The in-school interest subsidy has been called bad public policy, an inefficient use of taxpayer dollars, and a handout for students who will command healthy salaries after graduation. But each time policy makers have proposed ending it, they have faced stiff opposition from college lobbyists, who say the subsidy promotes college completion and the pursuit of advanced degrees.
Lobbyists say the outcome won’t be any different this time around, unless lawmakers put the money that would come from eliminating the subsidy into another college-completion program—an idea that has gained traction among some policy makers and researchers in recent years.
The Price of Deficit Reduction
Under current law, the federal government pays the interest that accrues on Perkins Loans and subsidized Stafford loans while a student is enrolled in college, for six months after graduation, and during deferments.
The draft proposal released this month by the deficit commission’s co-chairmen—Alan K. Simpson, a former Republican senator from Wyoming, and Erskine B. Bowles, president of the University of North Carolina and a former chief of staff to President Bill Clinton—suggested eliminating the subsidy on Stafford loans as a way to cut down on government spending.
Doing so would save the federal government roughly $5-billion a year and $43-billion over 10 years, according to the College Board.
But those savings would come at a cost to borrowers, who would pay higher interest on their student loans. With the subsidy in place, a student who borrows $5,000 in loans a year for four years at the current 3.4-percent interest rate would owe $20,000 and face monthly payments of about $197. Without the subsidy, the student would owe about $21,800 and face monthly payments of about $214.
The gap could grow even wider if Congress allows the interest rate on student loans to double in 2012, as scheduled. At a 6.8-percent interest rate, the same student would owe about $23,600 without the subsidy.
Mr. Bowles and Mr. Simpson have both said drastic measures are necessary to cut the country’s ballooning deficit, which by 2015 is expected to be $400-billion larger than economists believe is sustainable. By 2030 it will be more than $1-trillion larger than the projected sustainable level. The pair said that no programs should be considered untouchable.
“It’s time to lay it out on the table and let the American people start to chew on it,” Mr. Simpson told The New York Times when he and Mr. Bowles released the plan.
A spokeswoman for the 18-member, bipartisan commission says it should come as no surprise that the chairmen singled out the student-loan subsidy, because their report includes dozens of deficit-reduction proposals that have been on the table before.
But critics say ending the subsidy would balance the budget on the backs of students, increasing their debt burdens to bring down the nation’s.
“As a policy question, do we really want to finance the debt through making lower-income people have to pay more for college?” asks Sarah A. Flanagan, vice president for government relations and policy for the National Association of Independent Colleges and Universities.
The Best Use of Aid?
Congress created the Stafford subsidized-loan program in 1965 to encourage college completion and the pursuit of advanced degrees, especially among low-income students.
Studies have shown that loans in general encourage college attendance and completion, but there is little evidence that the interest subsidy has contributed to those goals. Though removing the subsidy would add about 10 percent to the cost of borrowing, it is unlikely to discourage many students from attending college, says Sandy Baum, an independent policy analyst for the College Board and a contributor to The Chronicle‘s Innovations blog.
The subsidy is also not very good at targeting the neediest students. Because subsidized student loans are awarded based on a student’s ability to pay tuition, middle-income students who attend expensive institutions are eligible to receive the benefit, not just low-income students.
In 2006-7, 36 percent of subsidized Stafford loans went to students who could be considered middle-income. (Seventeen percent went to dependent students whose families had annual incomes of greater than $60,000, and 19 percent went to independent students with incomes greater than $30,000.)
The current policy also does not take borrowers’ future earnings into account, so students who will be capable of repaying their loans after graduation often benefit.
“You don’t know ahead of time who’s going to be able to repay their loans,” Ms. Baum says. “So the policy is awarding a benefit without regard to who really needs it.”
In 2008, Ms. Baum led a College Board panel that recommended eliminating subsidized Stafford loans and directing the savings toward a program that would allow borrowers to defer payments, with subsidized interest, when their income drops below a certain level. Since then, others have suggested that the money could be used to expand Pell Grants or to pay the interest for students who take high-demand but low-paying jobs, like teaching.
Such approaches would be a better use of taxpayer money and could win broad political support, Ms. Baum says.
But some lobbyists fear the debate in Congress will be dominated by discussions about how to cut, not about what is the best policy for students and taxpayers.
“To the extent that it can be a policy conversation, I think we would welcome that,” says Becky H. Timmons, assistant vice president for government relations for the American Council on Education. “If it’s only about slash and burn, that’s going to be a completely different thing.”
Previous Challenges
The most substantive challenge to the subsidy came in 1995, in a budget-cutting plan offered by Republican leaders after their party gained control of Congress in the 1994 midterm elections. Like the deficit commission’s recent proposal, the Republican plan called for simply eliminating the subsidy without redirecting the money to another program.
The proposal met with resistance from college lobbyists, as well as administrators and students, who held protests across the country. Though the plan made it through the House of Representatives as part of a budget resolution, it was watered down in the Senate, so that it would eliminate only the subsidy on loans made to graduate and professional students. In the end, it was stripped from the bill entirely.
Some lobbyists said backlash against the proposal contributed to Democratic gains and to President Bill Clinton’s re-election in 1996.
Fourteen years later, House Democrats offered a more modest proposal: ending the subsidy on loans made to graduate students and shifting the savings to other student-aid programs. Even that plan failed.
The latest proposal still has a long way to go before it could become law. In order to even make it into the commission’s final report, it has to win support of 14 of the panel’s 18 members, many of whom have already expressed reservations about the chairmen’s proposals. If at least five members object, the subsidy plan could get cut from the final report, which is due out December 1.
Once in Congress, the proposal would likely face opposition from higher-education lobbyists and students, just as the Republican plan did 15 years ago.