REVIEW & OUTLOOK Updated April 26, 2012, WSJ
This week President Obama toured college campuses in states critical to his re-election. And thanks to an aggressive interpretation of federal law, he managed to get taxpayers to pick up the tab. But it was the content of his message that will really cost Americans: a demand that Congress cut the rates on federal student loans for the next academic year. Congress seems willing to oblige, which means taxpayers appear headed for another painful lesson in government lending.
The obvious political play is to shore up support among the college-age voters who went overwhelmingly for Mr. Obama in 2008 but are understandably less enthusiastic in 2012. So Mr. Obama is trying to cheer up these kids by freezing the current 3.4% fixed rate on the government’s subsidized Stafford loans for undergraduates.
The Pelosi Congress of 2007 knocked the rate down to 3.4%. But to make the program seem less financially reckless—and perhaps knowing it would be impossible for a future Congress to allow a rate spike in an election year—Democrats scheduled a doubling of the rate to 6.8% this July 1. Under fuzzy Congressional budget math, Mr. Obama’s one-year rate freeze will cost $6 billion, which he intends to cover by raising taxes.
At a campaign stop, er, we mean while travelling on “official business” at the University of Colorado at Boulder, Mr. Obama scored Republicans for suggesting that he was simply trying to distract attention from the bad economy. “What economy are they talking about?” asked Mr. Obama.
Probably the one that, according to the Associated Press, has left more than 53% of bachelor’s degree-holders under the age of 25 jobless or “underemployed.” This means that, desperate for paychecks, recent grads have taken low-skill jobs that don’t require their expensive educations.
In his own pander to the youth vote, presumptive Republican nominee Mitt Romney quickly agreed with Mr. Obama. “Given the bleak job prospects that young Americans coming out of college face today,” said Mr. Romney, “I encourage Congress to temporarily extend the current low rate on subsidized undergraduate Stafford loans.”
This must be the “Etch-a-Sketch” version of Mitt that his campaign promised. And sure enough, soon after Mr. Romney folded, so did House Republicans, who will vote to extend the cheap loans and pay for it out of ObamaCare funds.
A lot of the students on Mr. Obama’s college road trip seemed as confused as Mr. Romney, cheering a program that won’t apply to them because it only applies to new loans made after July 1. You might say that Mr. Obama is running a brilliant campaign to win over incoming freshmen, who will be most affected if the temporary freeze becomes permanent, but of course the real beneficiaries are colleges. They’ve reliably raised their prices to capture each new subsidy increase.
The bigger trouble is the expansion of another government credit program. Taxpayers already bear the default risk on these loans, which are made without regard to credit history. Now they will bear interest-rate risk too.