Community College Students Unlikely to Benefit from Cheap Loans

Subsidies on college loans tend to help the least needy, some experts say.

Student loan rates have become a hot topic for presidential candidates.

Keeping interest rates low on subsidized student loans is a key part of President Barack Obama's re-election campaign—and now Republican presidential candidate Mitt Romney has jumped on the low-interest bandwagon. 

Obama has proposed keeping the interest rate of subsidized Stafford loans at 3.4 percent for another year, instead of letting the rate double to its previous level of 6.8 percent. Over the 10-year life of the loan, that should save a graduate roughly $9 a month, or a little more than $1,000 total. The federal government would forego $6 billion to keep the rate at 3.4 percent for another year. 

Cheap loans are good for affluent and middle-class students at four-year colleges and universities, but few community college students will benefit. Only 14 percent of community college students took out federal student loans in 2007-2008, the most recent year for which data are available, reports the Institute for College Access and Success. 

Those who borrow don't borrow very much: Ninety-five percent of community college borrowers owe less than $20,000, compared to a median debt of $25,000 for student borrowers at four-year institutions.

Community college students, who tend to come from low- and moderate-income families, rely on need-based Pell grants, which, unlike loans, don't need to be repaid. And the Pell program is in trouble. 

This year, the maximum grant of $5,550 was preserved in a last-minute deal that cut grants for year-round students and restricted eligibility. Next year, the program faces a $7 billion shortfall. Advocates talk of Pell grants "going over the cliff." 

"Targeting a precious $6 billion right now to borrowers who have jobs and incomes high enough to cover the higher rate seems out of touch, especially when the Pell Grant program needs approximately that much next year to stave off a massive cut to the aid it provides," writes Jason Delisle, director of the Federal Education Budget Project at the New America Foundation in Washington, D.C. Stafford borrowers already can postpone payments if they fail to find work or earn too little, he notes. 

Furthermore, subsidized Stafford loans are based on family income and the cost of college. Students from wealthy families who go to very expensive private colleges can qualify for subsidized loans, while lower-income students often don't qualify if they've chosen low-cost public colleges, Delisle noted in an earlier post. 

"Some degree of pandering to various groups of voters is to be expected in any presidential election year," writes Matthew Chingos, a fellow in the Brown Center on Education Policy at the Brookings Institution. 

"But if Obama and Romney want to buy the votes of struggling college students, they should at least propose the more efficient path of increasing the grants that students receive when they attend college, not decreasing the interest they pay after they leave," he adds. 

The Obama administration and Congress have "reduced student aid funding targeted at low-income students" in recent years, complains Stephen Burd, a senior policy analyst at Education Sector. 

President Obama's American Opportunity Tax Credit (AOTC), introduced in 2009, "has proven to be a bonanza for the highest income group," Burd writes. Families making $100,000 to $180,000 receive more tax benefits, while families in the $25,000 to $75,000 range receive fewer. The government lost $14.7 billion to the AOTC in 2009—$3.88 billion to upper-income parents—he calculates. 

"At a time when the budget axe is falling on the Pell Grant program, providing billions of dollars in tax benefits to upper-middle-income families who don't really need the help is a luxury that the government can ill afford," Burd argues.

Source: US News Education