A decrease in student loan interest rate is a bad idea

A decrease in student loan interest rate is a bad idea

The new Democrat Congress recently voted to reduce the interest on some subsidized student loans from 6.8 percent to 3.4 percent, but Richard Vedder, writing in National Review Online, says this is a bad idea because the federal student loan program itself is harmful and the Democrat bill does nothing to mitigate that.

A historical perspective is useful. The great growth in college participation in the United States occurred before federal financial aid was a reality. With the single, but important, exception of the GI Bill, there were no large federal student-aid programs before 1970.

In that year, total federal student assistance amounted to $1.6 billion. About $1,000 per student in 2007 dollars, this was less than one-fifth the commitment today, even adjusting for inflation and the higher cost of tuition. Yet the number of college students per 1,000 Americans aged 18 to 24 grew from 23 in 1900 to 324 in 1970.

The explosion in aid began in the 1990s. From 1990 to 2000, federal student assistance more than tripled, going from $19 billion to $63 billion, but the proportion of the population in the 18 to 24 age group going to college rose only modestly (from 506 to 545 in a thousand). Among some groups, including males, there was no growth at all over this period.

The explosion in aid has actually accompanied a slowdown in the growth in college participation. There is little evidence that the aid epidemic has increased the proportion of adult Americans who are college graduates.

When the government pays, prices go up

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