Failure to agree to terms on student-loan interest rates before a July 1 deadline effectively increased the cost of obtaining higher education for low income Americans, despite the continued rise of college tuition at a faster rate than inflation. Partisan disagreement is again at fault as President Obama and House Republicans cannot agree on an appropriate interest rate to charge students.
The Higher Education Act of 1965 was signed into law by President Lyndon B. Johnson as another component of his Great Society policy agenda. Johnson realized the important role higher education obtainment played in improving an individual's standard of living. In a speech given the day he signed the bill into law, President Johnson called The Higher Education act the wisest and most profitable investment the nation could make, and rebutted claims that education and health and human welfare were not the government's concern. The Higher Education Act of 1965 not only provided scholarships and loans to prospective students, it also provided funding for colleges and universities to turn, as President Johnson put it, "the ivory towers of learning into the allies of a better life in our cities." Following the passage of the act, college enrollment has steadily increased from around 50% of recent high-school graduates in 1965 to about 70% in modern times. The need for more highly educated workers is probably greater now than ever considering the increasing share of global GDP generated through high skill intensive services and the labor shortages we face in many key industries because of the lack of qualified individuals. Rising income inequality creates a host of negative economic and social consequences and that will be exacerbated if more Americans are not able to develop marketable skills. Instead of harping on the costs of financing higher education, there needs to be a complete rethinking of post-secondary education that focuses on incorporating more individuals into the economy, lowering economic inequality, and addressing labor shortages.
Subsidized Stafford loans are available to students who meet need-based criteria determined by information provided in a Free Application for Federal Student Aid (FAFSA). Graduate students already lost the ability to receive subsidized loans last year. The Federal Reserve Bank of San Francisco released a paper earlier this year on U.S. economic mobility, which listed education as a powerful tool for improving one's economic condition. The authors' calculations show only 5% of children born in the bottom quintile of the country's income distribution who do not graduate from college ever make it to the top quintile, compared with 30% of children born into the bottom quintile who do attend college. Many low income areas in the U.S. are plagued by joblessness, high crime rates, and many other social ills, and consume billions of dollars in public funds by way of services meant to address the symptoms of poverty. These pockets of impoverished communities not only increase demand for social services but also are essentially economic deadzones where human and physical capital is not being utilized to their full potential, bringing down the collective productivity of society. Increasing the cost of attendance for children in these communities will certainly not have a beneficial effect.
President Obama and House Republicans offered similar proposals for how to address the deadline for subsidized rate increases over the recent months. Both would tie interest rates to the 10-year Treasury note, the same rate the government receives when it borrows. The president's plan arbitrarily adds one percentage point to that rate, which would remain locked for the life of the loan. The Republicans' plan would start rates at a floating 5% capped at 8.5%. Loan default rates are already used to access university quality among other things and should probably be considered incorporated into rate calculations going forward. Default rates have been increasing recently as the economy and labor market stagnated. However, the fact that by even the most conservative estimates current programs generate billions of dollars in annual surplus does not help support Republican concerns. Congress has the power to authorize these extra funds to be used in ways that could both lower default rates and help meet pressing labor needs. Why not offer more grants for STEM-related majors, provide funding for science and technology programs in low-income schools to spark curiosity and a love for learning in more youth, or provide more adult-education funding? If Congress could come together with educators and community development stakeholders to devise more beneficial and practical use of current funds, interest rates could potentially even be lowered.
Many high school graduates learn valuable skills in the military or by enrolling in a trade school, and these and other cost-effective ways to earn a living should be encouraged for individuals with the maturity to consciously decide college is not necessary for them to reach their future goals. However, the nation as a whole benefits when we have more highly educated people able to contribute to our country's output, as the global economy increasingly rewards nations that are able to provide high-skill intensive services and products. Novel approaches towards lowering or even removing the costs of obtaining higher education should receive more government and financial backing. Whatever human-capital development approach is used going forward shouldn't make access more difficult for the individuals society needs to enfranchise.