OUR VIEW: Student loans need reform

Sunday , June 17, 2012 - 5:08 PM

Pennies from heaven...

Editorial Board

There is a major push -- by students and others -- to convince Congress to not restore the interest rate for subsidized student loans to its proper 6.8 percent rate. The rate, currently at 3.4 percent, is set to move to 6.8 percent on July 1.

It's a bad idea to keep the lower rate. We understand that many adults are accumulating five-figure debt after colleges that, because the job market is so bad, is severely hamstringing their lives. It's like an anvil to these workers and we sympathize with their financial struggles.

But the restoration of a market-sound interest rate will not affect students who received the loans under the 3.4 percent interest plan. It applies only to loans taken out after July 1.

Artificially reducing the interest rate by half is costing the federal government billions of dollars and such fiscal malfeasance should neither be tolerated or enabled by our leaders. Nevertheless, we suspect that given the proclivity of pols in Washington D.C. to grovel to highly charged interest groups, a deal will be hatched to preserve the low rate.

That's the wrong solution. A better idea is to explore other reform ideas. One that should be considered in place of lower interest rates is to make colleges and universities more involved in the process. Under current rules, a school is assured that the student loan money will be repaid. Why not reform the system by making the school have more responsibility attached to the money it receives?

Washington University law professor Brian Tamanaha, author of "Failing Law Schools," suggests a "gainful employment" rule for schools. If too many graduates of a school are failing to get career jobs, then perhaps it's time to put limits on the amount of student loan money those schools receive.

Another suggestion is to cap the student loan money a school can receive. Why not put some competition on what disciplines are being subsidized by student loans? Money loaned to a student studying engineering, for example, is a better economic bet than many liberal arts majors.

As columnist Glenn Reynolds notes, "Today, the value of an education isn't going up, but the price is." We need to fix the structure of the student loan system. One suggestion: allow students to declare bankruptcy. That would not only partially eliminate substantial debts, it would also transfer some of the responsibility for the money to the schools. The situation now is that the more a school charges in tuition, the more student loan money it gets. It's free money for the schools, but years of painful debt for too many students.

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