Research & Commentary: Stafford Student Loans

Published May 29, 2012

As outstanding U.S. college student debt passed the $1 trillion mark this year and college costs continued to rise faster than health care costs, U.S. policymakers have made several changes and proposals to meet increasing public concern. President Barack Obama proposes to extend a five-year artificial cap on federal student loan interest rates at 3.4 percent, which House Republicans quickly passed and Republican presidential candidate Mitt Romney also endorsed.

Obama and the lawmakers argued the subsidy extension was necessary to help already financially overburdened college students and their families, especially in this tight economy.

Taxpayer advocates, however, noted the rate extension would save the average student only 30 to 80 cents per day while costing taxpayers another $6 billion on top of the current federal deficit and debt—the largest in the nation’s history and quickly approaching levels historically shown to be unsustainable.

They also point to economic analyses showing federal higher education subsidies inflate college costs, as evidence the subsidies are the real cause of this dire situation. Further market inhibitions such as extending the Stafford loan rate cap will only exacerbate the problem, they say.

The following documents offer more information about federal college loans and rising college costs.


A Generation Hobbled by the Soaring Cost of College
With more than $1 trillion in outstanding student loans in the United States, college debt is ubiquitous and significantly harming young adults and the economy, reports the New York Times in a series on the topic. Some observers are calling college debt the next economic bubble, after the housing market bubble that precipitated the current economic downturn. Default rates are rising rapidly. The problem is exacerbated by federal subsidies insulating families from the immediate effect of rising college costs. In addition, lawmakers are beginning to require state colleges to raise more funds from student tuition. No one has a vested interest in reducing costs except current students and their families.

Policymakers Debate Student Loan Interest Hike
Congress is considering extending a five-year schedule of artificially reduced federal Stafford loan rates at President Barack Obama’s behest, reports School Reform News. Doing so would cost taxpayers another $6 billion while doing nothing to reduce the cost of college or signal to families that price is a central consideration when sending a child to college. The interest in extending the reduction comes from a misguided desire to send everyone to college even if it’s not a good fit for many young people and the economy requires a sizeable portion of workers who have training other than a four-year degree. 

The Sorry Stafford Panderfest
Federal Stafford loans are a middle-class entitlement the government and U.S. taxpayers cannot afford, writes Frederick Hess in National Review. Keeping the rates artificially low would offer borrowers only an extra 30 to 80 cents per day and eliminate cuts already needed to slow the growth of the country’s enormous debt. President Barack Obama, Mitt Romney, and congressional Republicans are misrepresenting the facts to pander to voters while selling them out.

Containing the Costs of Higher Education
Student loan interest rates have become a national issue because families are borrowing ever-increasing amounts to keep up with the rising costs of college, write Douglas Holtz-Eakin and Chad Miller in National Review Online. But as college costs rise, the value of a college degree continues to decline. Government fuels this waste by increasing subsidies, which protects colleges from having to keep costs down and deliver quality education to students. Federal higher education subsidies have risen 166 percent in the past decade, the authors note.

Ten Steps to a Better University
Jane Shaw, president of the Pope Center for Higher Education, shares 10 strategies public universities can use to restore public confidence in them while cutting costs. These include limiting enrollment to increase college completion rates, reevaluating academic programs for rigor and duplication, return to a focus on teaching undergraduates rather than research and graduate students, cut administrator salaries, and improve teacher training and degree programs.

A Rip Van Winkle Plan?
Jane Shaw of the Pope Center for Higher Education critiques the ideas of a prominent university leader who predicts major changes to higher education in 20 years. Shaw says major changes are happening now and will upend many universities’ bloated, unproductive manner of functioning on students’ borrowed dollars. Innovations that make a credible college degree cheap and accessible or alternate credentials widely trusted are already in the works, she writes.

Introducing Bennett Hypothesis 2.0
A modified version of the idea that federal subsidies inflate college costs better fits the available data, concludes Andrew Gillen in a Center for College Affordability and Productivity economic analysis. Gillen takes into account three refinements: universal aid is far more bloating than aid aimed at poor students; selectivity, tuition caps, and price discrimination complicate evaluations; and correcting for changes over time. To address rapidly rising higher education costs, the public needs to know more about university outputs so schools begin to compete on value, not prestige, and government subsidies must be limited strictly to the poorest students.

The Worst of Both Worlds
In a review of several studies, higher education analyst George Leef demonstrates federal student aid both increases the price of college and reduces student effort and learning. This happens because federal aid crowds out incentives to apply effort and reduce costs and obscures the virtues of hard work and saving. These devastating effects show it’s time to realize federal college subsidies are a mistake and to pull the plug, he concludes.

Higher Education for All?
The federal government must get out of the business of making student loans, writes Richard Epstein in the Hoover Institution journal, Defining Ideas. The largest program, the federal Stafford loan, has displaced the previously strong three parties that worked together to get young people to college for less money and with fewer loans: students shopping for the best value, parents cosigning loans or paying for college outright, and private institutions awarding scholarships and financial aid. Each of these has a strong incentive to make the college investment work because they are closest to the process and the people in it. Government also greatly restricts colleges’ ability to control their own costs by highly regulating how they use and pay for labor.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the School Reform News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland education policy research fellow Joy Pullmann, at 312/377-4000 or [email protected].