National Review Post Explains that Student Loans are Costly for Taxpayers

Interest rates on federal Subsidized Stafford student loans for undergraduates are scheduled to increase this year to 6.8 from 3.4 percent for newly-issued loans. This has caused an outcry among students and advocates who want Congress to extend or make permanent the 3.4 percent rate. The Obama Administration has proposed a one-year extension. At the same time, many stakeholders are convinced that the federal government profits from student loans due to the way the government measures the cost of loan programs. They use this claim as further evidence to support extending the reduced interest rate.

Today, the Federal Education Budget Project’s Jason Delisle wrote a guest post in the National Review’s domestic policy blog, “The Agenda” by Reihan Salam, stating that current estimates do not fully reflect the true cost of student loans because they do not account for market risk (the unexpected losses) inherent in making the loans. Estimates that account for this risk using the “fair value” method – a method that most people prefer to use when they value loans in the market – show that the government has set the rates and terms on federal student loans “below cost.” That is, the federal government is actually subsidizing borrowers, not profiting off of them. Delisle’s post argues that lawmakers and advocates should keep such costs in mind when debating what interest rate Congress ought to charge on student loans.

To read the full article, click here.