What a Brookings fellow told MPR about the student-loan interest rate debate

Here's a rough transcript of this morning's Daily Circuit segment on the deal reached in Congress over the student-loan interest rate battle.

It would extend the 3.4 percent rate another year, thus avoiding the doubling of the rate to 6.8 percent July 1. (You may remember U.S. Congressman Keith Ellison's stance on interest rates, which I wrote about here and here.)

No vote on the deal has been scheduled yet, but Congress should address the matter before its July 4 recess.

This morning, The Daily Circuit's Tom Weber spoke with Matthew Chingos, a fellow in the Brookings Institution's Brown Center on Education Policy. The comments below are not verbatim.

Matthew Chingos: The last couple of months have seen an agreement between Democrats and Republicans. At least for political reasons, they feel they can’t allow the student loan interest rates on one class of federal loans to double from 3.4 percent to 6.8 percent on July 1. In the last year or two, it seems Congress has to fight over how to pay for every little thing they do. But it seems they've reached some deal on how to pay for it. If it's approved, they'll have a one-year extension -- and we can talk about it all over again next year.

Tom Weber: In an online chat, you wrote that neither presidential candidate has shown leadership. President Obama and Mitt Romney have engaged in cheap political theater to win the votes of college students. Why do you say that?

MC: Because this discussion is not about how we fund higher education. It's not about the real problem -- the rising cost of college. This debt is a symptom of the rising cost of college. And this isn't designed to deal with that. It's about one interest rate on one class of loans -- only new loans -- and those already with debt won't be affected by it. It's not over nothing -- the savings would be about $1,000 over the life of the loan, according to the White House -- but it's not going to affect college affordability at all. It's just something in the campaign season. It's politics. If it were really about affordability, it wouldn't be about just one interest rate.

TW: So you think it's really not that consequential.

MC: Right. And it highlights the problem of Congress setting an interest rate. In the market, interest rates fluctuate over time. Sometimes rates will seem like good deals, sometimes like bad deals. So if Congress wants to subsidize interest rates, what it should say instead is that the rate will be whatever the market rate is -- minus some subsidy that it'll provide. So you want that rate to float, instead of pegging it to something that will make sense at some times -- and then a couple of years later seem like a dumb policy all of a sudden.

TW: Do you think that people realize during this debate that this only applies to new and subsidized loans that in theory haven't been approved yet? That it has zero bearing on all of us who still have student loans out? Do you think that got out into the broader public debate?

MC: I don't think a lot of people understood that. The way the president campaigned on this issue obscured the fact that this policy only applied to new loans. And it only means slightly higher payments. I think if people understood more of the details of the policy, they might not be so excited about it.

TW: You also indicated in the chat that Romney at one point didn't seem to understand the finer points of the policy.

MC: Yeah. And I think both have tried to capitalize on the confusion.

TW: Because both the president and Romney support this in general, doesn't that force their hand a year from now? They couldn't just let it rise to 6.8 percent after what they've said now.

MC: Not necessarily. A year from now, whoever is president can say, "That was a different time. The economy is better now. We can afford to let the rate rise." What I hope will happen is this: The Higher Education Act is set to expire in 2013. So if Congress manages to reauthorize that legislation next year, perhaps this issue could be swept into that legislation. And we can see some broader, wholesale reform that will really tackle college affordability and not just play politics with interest rates.

TW: You're saying the bigger principle is debt. What's the solution?

MC: The bigger issue is the cost of college. It’s going up year after year. The real problem in the market is that it’s extremely dysfunctional. In computers, for example, you compete on quality and price. In higher ed, there’s little information on the quality -- such as how it relates to job placement. Obama has proposed a college score card, which would let them compete on quality and cost - and not amenities such as swimming pools and gymnasiums, which instead drive up costs.

TW: What about bankruptcy? Student loans can’t be discharged that way. What kind of role does that play?

MC: It’s terribly unfair. I’m for letting loans be discharged through bankruptcy. That’s the reason we have bankruptcy laws. Student loans shouldn't be protected.

TW: What will happen when this comes up again in a year?

MC: Hard to say. If Congress doesn't roll the issue into the Act as I suggested, I think you’ll see political theater. Maybe a longer-term solution -- such as making the 3.4 percent permanent if the Democrats are in power. There could be a compromise. Or it may go out if the Republicans are in power, and they could replace it with a solution that's more market-driven.

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