Should The Government Charge Interest On Student Loans?

Education is an investment in the future of the US. Better educated people on average earn more, pay more taxes, start more businesses, file more patents, create more inventions and innovations, and employ more people over their lifetime.

Does it make any sense for the government to impose an additional cost on their education by charging interest on loans for education purposes?

Interest represents the cost of deferring today's consumption until a later date. It makes sense for individuals and households who have budgetary constraints. It makes no sense for the US, which does not have the same budgetary constraints as an individual. It also does not accurately reflect a risk of default since student loans are not dischargeable in bankruptcy, the government can make the unpaid loans legally collectible during a person's entire life. The government also has access to all enforcement remedies including IRS data and refunds, liens and wage garnishment.

Like many recent college grads, Steven Lee finds himself unemployed in one of the roughest job markets in decades and saddled with a big pile of debt. He owes about $84,000 in student loans for undergrad and grad-school costs.

But what Lee's angry about isn't the slings and arrows of an outrageous economy, and it isn't the idea that he owes a ton of money for all the learning he's received. It's the interest rates on his government-backed student loans, which range from 6.8 percent to 8.5 percent.

From an article in the October 18, 2009, Chicago Tribune, "Interest on loans rankles college grads" by David Lazarus.