With subsidized student loans set to expire in July causing an increase in interest rates from 3.4% to 6.8%, President Obama has been in the public eye pressuring Republicans to keep interest rates down. Most recently, Obama appeared on Late Night with Jimmy Fallon, a popular show among young voters.
The timing couldn't be better for the president. He gets to highlight a campaign issue, connect with young voters, hang out with the Roots, reinforce his image as the "cool" candidate, and — because it's not an official campaign event — do it on the taxpayer's dime. The President's humorous use of the bully pulpit seems to have been effective, as House Republicans passed a bill renewing student loan subsidies only a few days after his Jimmy Fallon appearance.
It's difficult to know whether student loan subsidies would get renewed if this weren't an election year. As GOP presidential candidate Mitt Romney tries to sway young voters and women, campaigning against these subsidies would be bad politics, even if it goes against conservative principles. It's no surprise that congressional Republicans will fall in line behind Romney as they try to accomplish the "single most important thing they want to achieve": making President Obama a one-term president.
While the renewal will likely pass, Democrats and Republicans will continue to argue over how to fund it. Democrats want to close tax loopholes for wealthy citizens, while Republicans want to cut the Prevention and Public Health Fund, a provision in Obamacare that establishes several community-based public health programs.
To be sure, the money is basically chump change at $6 billion per year. So the public posturing is entirely political. Only a few weeks ago, conservatives railed against the "Buffet Tax" for only raising $50 billion per year. Surely, $6 billion couldn't get them excited?
Whether student loan subsidies are, in fact, good policy depends on your frame of reference. Education is what economists call a "public good," meaning that, when one person consumes more of it, it doesn't mean that others have to consume less. When I eat an apple, for example, that means there will be one less apple for others to eat. But when I learn French or organic chemistry, it doesn't stop anyone else from doing the same.
Human capital theory suggests that more educated societies are more productive, innovative, and democratically stable. So, when countries invest in education, it pays off both for society and the individual.
But that doesn't mean that subsidizing student loans are necessarily the most efficient method for making these investments. When students use loans to finance education, it *feels* like free money, and people are generally bad at planning for the future, particularly when it comes to personal finance. In part, this has resulted in skyrocketing college costs, particularly at four-year universities.
There are many ways to reform higher education funding to both increase access and curb costs. One way to give subsidies to public institutions directly and require them to provide free tuition. Another is to provide students enrolling in private institutions with lump sum grants upon enrollment. This would encourage institutions to price tuition competitively and students to consider costs in the short-term.
Unfortunately, political institutions are only designed for incremental change. So, we are unlikely to see funding reform for some time. And, while student loan subsidies may not be ideal, they are certainly better than cutting funding altogether.