Tuesday, April 24, 2018
Opinion

Rate hike is nothing but tax increase on students

The debate in Washington about whether to raise student loan interest rates from 3.4 percent to 6.8 percent is nothing more than a debate on whether to place an unjustified tax on students and families. Making college less affordable for potential students will only hinder our economy in the long run.

There is no market justification for this level of change; no paper trail of substance as to how 6.8 percent is a defensible rate at this time. It is purely a fallback to when rates were at that level five years ago.

Currently, if you can get financing, home mortgage rates hover around 4 percent to 4.5 percent; 10-year home loans are at less than 3 percent. Car loans are constantly advertised from 0 percent to 3 percent. And how about that great rate you are receiving for your CD deposit at your local bank? Even the federal government is paying less than 2 percent for 10-year notes. Yet students, the individuals most likely to have the least assets and lowest starting wages, are expected to pay 6.8 percent on loans. It appears as if Washington expects students to finance federal spending.

The conversations in Washington on both sides of the aisle seem to have forgotten basic rules of balance sheets, with income on one side and expenditures on the other. They are currently squabbling over how to "pay for" keeping the rate at 3.4 percent for "subsidized loans."

Pay for?

I thought interest paid to the government was income to the government. Why would students have to "pay for" a reduction in income? Further, why are they called "subsidized" if the market rates are hovering around the current 3.4 percent rate in the first place?

If Washington collects less income tax this year because Americans are making less money than in previous years, does Congress expect to have to "pay for" this reduced revenue? The answer is no. But this is how they are handling the student loan conundrum. Each side is frozen with arguments about which new tax or reduction of spending has to "pay for" charging students a market-driven and much more fairly applied interest rate on student loans.

Here is a reasonable proposal: Charge students a market-driven rate with some basis in reality. For example, use the current rate charged for a 10-year mortgage, with perhaps a slight add-on since there is no underlying asset to guarantee the loan other than a lifetime personal lien against the borrower. Then add a provision to each loan document that allows the rate to accelerate to a specified higher level upon the passing of 10 years and failure to repay, or at any time the loan payments are in default. Follow this up by budgeting for the payment income based on the expected rate of return on all outstanding loans. Any default values and loans collected with higher accelerated interest rates, whenever collected, could go directly to national debt reduction.

Lately, Congress seems to blur the reality of the marketplace in favor of "D.C. speak." Students have one main source for loans now that Washington squeezed private lenders out of the market, and that is the federal government. There is no accessible open marketplace anymore with students being personally responsible for entering into transactions with eyes wide open. They are bound to the company store for loans, and the company store has already spent the anticipated 6.8 percent value, causing it to have to scramble in an election year to not harm so many in a most inopportune time.

Perhaps this is really just a precursor to the "Taxaggedon" in the coming year as rates may rise in most every form of federal taxation. It does send a message to voters that the main concern in Washington is income to feed Washington. Either way, it is the students of our country who needed to borrow to climb up that proverbial ladder of success. Higher education matters, and students know that. There is tremendous value in obtaining a degree that benefits the individual and our economy for a lifetime. Students seek to better themselves and collectively they better us all. Taxing them by doubling the loan interest rate is no way to assist our country's future.

Ed H. Moore is the president and CEO of the Independent Colleges and Universities of Florida.

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