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Higher, Not Lower Interest Rates Will Save Higher Education

As the nation's total student-debt hit a staggering $1 trillion this month, Republicans and Democrats in Congress have turned to legislation that could only make the problem worse.

The Interest Rate Reduction Act,  cleared by the House and currently being debated in the Senate, would suppress borrowing rates on government Stafford Loans for low-income students at 3.4 percent instead of allowing it to rise as scheduled to 6.4 percent.

The average university student graduating in 2010 had borrowed $25,250. Unemployment in 2010 for graduates sat at 9.1 percent. Associated Press analysis from 2011 revealed 53.6 percent of unemployment or underemployment for graduates under the age of 25.

Knowing the economic calamity that must result from such sustained reckless borrowing, congressional proponents of the rate freeze are responsible for pushing the harmful myth that a lavish college education is an American birthright. They will be responsible when the student-loan crisis cripples the very constituents whose votes they are trying to buy in this election year.

Few, if any, lawmakers have shown the courage to draw the clear parallel between this crisis and the mortgage crisis, which spun the world into recession in 2008 making everyone poorer.

"Higher education can’t be a luxury – it’s an economic imperative that every family in America should be able to afford," said President Obama in his State of the Union Address earlier this year.

In suggesting that an exorbitantly priced education is a part of the intangible American dream, Obama echoes his Democratic predecessor, President Clinton, who shared a similar sentiment in announcing his National Homeownership Strategy aimed to create 8 million new homeowners by 2000.

“This is a big deal,” said Clinton. “This is about more than money and sticks and boards and windows. This is about the way we live as a people and what kind of society we're going to have.”

For the next decade Congress and the Federal Reserve artificially suppressed interest rates and safeguards, thus encouraging Americans to borrow based on their president’s emotional vision rather than the cold hard numbers.

Where did this get us? Home values inflated, and people took big risks throwing money around for things they thought were valuable but really weren’t.

Now Washington is doing the same thing with college education.

Its push to keep interest rates low is making it easier for financially illiterate students to borrow tens and sometimes hundreds of thousands of dollars to buy a degree, pumping up the costs just as federal housing policy over-inflated the price of a house.

Low interest rates and easily obtainable loans are allowing students to spend lavish sums on education that is unlikely to prepare them to pay it back. The free flow of credit also allows universities to raise tuition as well as their own salaries and to allocate funds in irresponsible and unproductive manners.

The point is, if college were a car, most Americans never buy it. You’d look at it and say, sure, it’s a car, but why does it cost $350,000? Why does it have a solid gold trailer hitch on the front bumper, and a sunroof in the hood, and a pasta maker on the dashboard?

Families toss endless money at the college rip-off, thinking all degrees are made equal, happy to take on prohibitive expenses for the vague promise of creating a “well-rounded” person, or worse, teaching their kid the life-long lesson of paying off debt.

The better answer is to just let the interest rate jump to 6.8 percent. If students feel the pressure to pay market prices for their college “experience” maybe they will become more discerning customers,  forcing American universities to compete in an efficient and competitive marketplace.

One last thing…
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