Ending Deferred Interest on Student Loans is a Really Stupid Idea

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July 24, 2011 by Daniel Stack

It seems unfair to pick just one stupid idea out of the numerous incredibly stupid ideas emerging in the debt ceiling debate going on right now. Indeed, that we as a nation are even considering defaulting is one of the most foolish things to ever emerge from Washington.

I am however, going to pick on one of the many money-saving ideas that are directed at the lower- and middle-classes to serve as an example. One of the ideas floating around is ending deferred payments on federally subsidized student loans.

Right now if you take out a Federally guaranteed student loan no payments are due until some months after graduation with interest paid for by the Federal government. This is one of the places being viewed as a possible means of trimming down the deficit. Essentially, interest payments would become due immediately, possibly years before graduation. Like many others, it meets the conservative goal of not being a tax increase – but instead places a financial burden on lower and middle income Americans.

It is important to note that these loans aren’t going to allow you to go to an exclusive private school. There are maximum loan amounts per year with a total subsidized limit of $23,000 (source: Student Aid on the Web). That’s good for a state university or community college.

I was a beneficiary of such loans. I came from what would probably be considered a lower-middle-income family. I had grants and my parents and grandparents helped to the extent they could but I also had to take out Federally Subsidized Stafford Loans to pay my way through school. There was no way I’d have been able to afford interest payments while an undergrad at the University of Connecticut.

That said, I’d like to think that loan was a good investment for my fellow taxpayers to have made in me. I graduated with a degree in Computer Science and Engineering. My starting salary was far more than would have been even remotely possible without my degree. It allowed me to begin a career that I’m still in. I paid off my loans early as it turns out. Financially my family is doing well – we could be doing better but we’ve no cause to complain at present. And the government has brought in far more in tax payments from my family as a result of my degree than would have been possible without it.

Not everyone who graduates from college goes on to be successful. Like most families a major illness or job loss would be devastating to my family. But looking at statistics via a quick googling, the unemployment rate for those with college degrees has consistently been lower than it is for those without them. Those who are  employed pay more in taxes than those who are unemployed. In other words, taxpayers with a college degree is a good investment for the Federal government.

The fact that such things are even being considered for cuts shows how unwilling we have become as a nation to invest. Yes, investing costs in initial outlay of money. And yes, that might mean more taxes for some – often for those who most benefitted from such programs in the past. But careful investment will more than pay for itself. Beyond being the moral thing to do, it is often the sound financial thing to do.

Instead, look at us today. The nation that built the transcontinental railroad, the interstate highway system, massive public works projects now has a crumbling infrastructure. The nation that made a college education obtainable for most people with ability, that paid for it for veterans, is putting it out of reach for those without financial means.