NPR: Dems’ #InTheRed college debt plan ‘would benefit higher earners’

The Democratic proposal has three goals:

1. Refinance and set student loan debt at 3.86 percent
2. Push President Obama’s proposal for two years of free community college
3. Increase Pell grants by the rate of inflation to compensate for cost-of-living adjustments

“Stabenow said the $120 billion worth of student debt help over 10 years offered with the proposals would be fully funded by closing some tax loopholes on the ‘very wealthy,’” Mlive notes.

Prominent Democrats have taken to Twitter to promote the initiative.

The wisdom and effectiveness of the proposal should be met with skepticism, however.

Student loan interest rates factor in the risk of a loan to a prospective student. It isn’t like a car loan, where a lender can repossess the vehicle. With a college degree, a bank can’t repossess a brain or four (or five, or six…) years of experience on campus. The loan doesn’t involve a fungible asset a bank could reclaim to lessen the pain of a bad investment. A reduction in interest rates “would likely benefit higher earners more than a lot of struggling lower-earners,” NPR noted. Low-income students don’t borrow as much as students from high-income families, and the move would favor upper-middle and upper-class students.

For tax loopholes, the Democrats could build political momentum.

The public responds positively to rhetoric about closing tax loopholes and making the tax code progressive (though it already is). Closing tax loopholes isn’t so straight-forward, however. One person’s loophole is another’s deduction, as Megan McArdle noted. The loopholes for the “very wealthy” have a small impact on the federal budget. For loopholes to be closed, and for Democrats to generate enough revenue to cover student loan debt and college tuition, they would have to end deductions that benefit the middle class the most.

Opposition to loopholes and deductions falls when it turns out that the average American benefits from their overall effects.

Free community college isn’t so free, either. The federal government would need to find $60 billion in revenue to pay for it, along with about $4 billion from state governments, according to a recent study. Given low college graduation rates, especially for community colleges, the return on investment for $64 billion isn’t clearly positive. More money in the system could create more college dropouts without a gain in skills or productivity.

Pell Grants, the largest federal grant program, targets students based on demonstrated financial need. The grants have struggled to keep up proportionally with the rising cost of college, even as grant expenditures have increased from $7.2 billion in 1999-2000 to $33.6 billion in 2011-12, a 466 percent increase, according to the National Center for Education Statistics. Students receiving the grants have also climbed, from 3.8 million to 9.4 million in the same time period. In 1999-2000, 21.8 percent of students received a Pell Grant worth an average of $1,900. By 2011-2012, 41.3 percent of students received one, the average amount reaching $3,400.

The problem with Pell Grants, though, is that it’s unclear whether they encourage degree completion. The Department of Education doesn’t have data on Pell Grant recipient graduation rates, but it seems as if they have dramatically lower graduation rates than non-Pell Grant students.

The Democrats could see success with their #InTheRed plan. Unfortunately, it would do little to lower the costs of higher education, or improve the value of an education for students.