Giving borrowers a break on their student loans is good politics for Democrats — but is it a fair policy?

The numbers for college debt in the U.S. are hard to ignore — currently, about 40 million Americans hold a total of $1.3 trillion worth of debt from loans taken out to pay for their college degrees.

That’s more than the total Americans owe in credit card or auto debt, but unlike those types of debt, three-quarters of what U.S. students owe is backed by the federal government. Students who are approved to take out loans from Uncle Sam benefit from better interest rates than they would receive from private lenders.

For some elected officials, though, those rates are still too high — and they believe the government is unnecessarily adding to borrowers’ debt burden by not lowering them. Democrats in Congress, as part of a college affordability campaign announced last month, are calling for legislation to reduce the interest student borrowers pay on their loans.

Those lawmakers, including Sen. Amy Klobuchar and Sen. Al Franken, argue that loan refinancing will put badly needed cash into the pockets of struggling recent graduates, making them less likely to default on their loans.

But those on the right have their own questions about how effective that approach would be. Conservatives dispute how much the neediest borrowers — like those who have loans but didn’t graduate — stand to benefit from a refinancing program that would cost billions. They also suspect the Democrats’ push is motivated by a desire to engage young people and drive voter turnout in an election year.

Student debt rises in the U.S. and Minnesota

Minnesota might be home to some of the country’s best-educated residents, but that has come at a cost: The North Star State ranks fifth in the nation in college debt. Its students graduate with an average of $31,000 in loans, more than in Wisconsin, Illinois, California, or New York.

In Minnesota and elsewhere, the pressure point for many loan-holders — and what’s making the current situation more serious — is the combination of rising tuition costs and stagnating wages. As public and private institutions’ tuition costs have gone up, students have had to take out bigger loans.

According to U.S. Department of Education data, median student debt has risen 136 percent since 1990 — from about $12,000 to nearly $32,000. At the same time, the median salary for a recent college grad has only risen a percent and a half, making it harder for students to pay off those larger debt loads.

In the past few years, Democratic politicians have worked the student debt issue into a cornerstone of their domestic policy platform. Progressives like Massachusetts Sen. Elizabeth Warren have argued that student loan payments represent not just a crushing burden on younger Americans, but a millstone on the broader U.S. economy. 

Democratic plans center around refinancing loans

Democrats believe that lowering loan interest rates is a key way to ease borrowers’ debt burden. Student loan interest, Warren has said, produces “obscene profits” for the federal government and for private lenders.

Interest rates for government-backed loans are pegged to the 10-year Department of the Treasury note, which fluctuates — as of Feb. 11, it was at 1.63 percent. Added on to that is an interest percentage that varies depending on the type of loan.

The White House called for a market-based peg for loan interest rates in 2013, and 2nd District GOP Rep. John Kline helped shepherd a law through Congress, signed by Obama in 2015, that determined the exact amount the feds add on in interest.

Right now, undergraduates who take out federal loans pay a 4.29 percent interest rate, while graduate students pay anywhere from 5.84 to 6.84 percent. Interest rates for private loans vary widely, but they can easily double the government’s rates. Under current law, rates fluctuate, but undergraduate federal loans are capped at 8.5 percent interest, and graduate loans are capped at 10.5 percent.

What does that mean in practical terms? Take the average Minnesota undergraduate, who graduates with $31,000 in loans, and gets the median entry-level salary for a bachelor’s degree-holder, which is $43,000. (The federal government, in calculating loan repayment plans, factors in annual income.) Over a 10-year period, at 4.29 percent interest, that Minnesota student is expected to pay $7,200 in interest to the federal government.

Many Democrats maintain that these rates are still too high for student borrowers, and they’re worried that they will increase with fluctuations in the market. Warren, along with Franken, co-sponsored a bill in 2014 to allow federal and private loans to be refinanced at a 3.86 percent interest rate, and the idea has the backing of most Senate Democrats. At that rate, that average Minnesota borrower from above would pay $6,480 in interest over the 10-year life of the loan, saving $720 compared to current rates.

Warren and Franken’s bill was blocked by Senate Republicans, but in this session of Congress, Democrats have wrapped a similar loan-refinancing proposal into a larger package that addresses college affordability. The Reducing Educational Debt Act also calls for two years of free community college, as well as the indexing of federal Pell Grants to inflation.

Franken, who serves on the Senate’s education panel, called student debt a crisis that demands action. “I always hear that student debt is holding back Minnesotans from buying homes, starting families, or launching businesses,” he said.

But Franken blamed Republicans for holding up measures Democrats have backed. “They’ve blocked my legislation to let more than 550,000 Minnesotans refinance their student debt,” he said, and added that Republicans tried to “gut” the Pell Grant program, a longstanding Department of Education initiative that gives tuition grants to financially needy college students.

The nonpartisan Congressional Budget Office has estimated that lowering rates to the levels Franken and Warren proposed would cost $55 billion over a decade. Klobuchar, who serves on the bicameral Joint Economic Committee, says Congress can pay for lower interest rates by instituting a tax on high earners that is sometimes called the Buffett Rule — this was also the funding mechanism used in the Warren-Franken bill. “That’s the most fair way for the middle class. … If we can get some wind behind our sails with young people and their parents and make a dent in this issue, it’s heading that way.”

Refinancing too broad a remedy

Republican politicians and policymakers don’t disagree that there’s a student debt problem, but they have reservations about Democrats’ proposals to allow borrowers to refinance at even lower rates.

In 2014 and this year, Republicans have accused Democrats of using the student loan issue as an election-year tactic to gin up enthusiasm — and turnout —  from college students and recent graduates, constituencies that have historically leaned heavily Democratic. GOP Majority Leader Mitch McConnell said in 2014 that the Franken-Warren loan refinancing bill was a play to give Dems “an issue to campaign on to save their own hides this November.”

In a statement to MinnPost, Kline, who chairs the House Committee on Education and the Workforce, was a little more forgiving.

“The idea of refinancing college loans has been around for some time, and the challenge has always been how do you do it in a way that’s fair to both students and taxpayers,” he said, adding that he believed some Democratic plans would result in additional tax burdens for small businesses.

“No doubt this proposal is well intended,” Kline said, “but I’m afraid it will ultimately hurt those we intend to help.”

Some policy experts, and not just on the right, argue that lowering rates for nearly all student borrowers is an unnecessary subsidy and waste of money that could be better used elsewhere.

Non-targeted loan refinancing is a stimulus package for the educated, argues Andrew Kelly, who studies higher education at the right-leaning American Enterprise Institute. If you make nearly everyone eligible for refinancing, the biggest benefits go to those with the most debt, Kelly explains — and those people tend to have advanced degrees, and the most earning potential down the road.

“People who went to college, took on some debt, and didn’t graduate often have very little debt, less than $10,000. Loan refinancing only saves them a few bucks a month,” Kelly says. “They have debt, but don’t have the skill payoff. In that way, it’s not a well-designed policy from my perspective, because it doesn’t target subsidies to people who need them most. It does the opposite.” These types of borrowers are disproportionately of minority and low-income backgrounds, too.

Iris Palmer, a higher education analyst at the centrist New America Foundation, says funds from the $50 billion proposal might be better used to target smaller-dollar borrowers who didn’t get much value out of their experiences.

“It’s probably better public policy to put money in Pell Grants on the front end, or actually do some loan relief on the back end to help people with small loan balances … those are the people who are generally hurting.”

Kelly says that to really address college affordability and student debt, structural changes have to be made to the system. He argues higher education institutions don’t have much incentive to keep tuition costs low when they know the federal government will pick up part, or most, of students’ tabs.

“Institutions should bear some of the risk. Right now, colleges don’t bear a lot of risk at all,” Kelly says. “What are the incentives colleges face to keep tuition low, and ensure students are succeeding? Loan refinancing won’t answer that question.”

A first step

Left-leaning experts counter that reforms to lower the cost of college should be addressed, but bolstering refinancing options, while not a long-term solution, should still be a near-term goal. Federal loan default rates are dropping, but 11.8 percent of borrowers still defaulted on their loans in 2015. (By comparison, defaults on auto loans were 0.85 percent as of 2015, the lowest number in 11 years.)

According to Maggie Thompson, who leads student debt advocacy at the liberal Center for American Progress, loan refinancing is hardly the only thing policymakers should do to address the problem, but it’s an important first step.

“For a borrower to refinance would allow them to lower monthly payment and lower the amount they pay over the life of the loan,” Thompson says. “These are significant savings for student loan borrowers.” While that average Minnesotan borrower might only save $70 a year under proposed refinancing, graduate student borrowers could save much more because of the high price tags of their degrees and the higher rates at which they borrow.

Thompson admits that borrowers with low debt loads and without degrees won’t benefit as much from refinancing, but she argues that doesn’t invalidate the premise of Democrats’ proposals.

“The rates are already too high,” she says. “The rate at which the federal government lends to banks versus the rate they lend to students, the spread is too big. We have these loans, and the reason we have the system is that people can get funds they need to go to college. So, why then are we giving these loans as a form of aid when we know the federal government has the ability to lower them?”

What to expect in 2016 and beyond

Despite the back-and-forth between the two sides on the interest rate issue, it’s unlikely it’ll amount to more than that, especially in an election year. Given that interest rate policy was passed last year, there’s virtually no chance D.C. will make new policy to lower them — at least not unless Democrats take back one or more chambers of Congress.

And that may be the point: Palmer at New America and Kelly at AEI say that it makes sense that Democrats are looking now for opportunities to hammer away on student debt — it’ll help them in their mission to take back the Senate.

“I can see why it’s good politics,” Kelly said. “Democrats tend to want to mobilize the young voters, and for voters with student loans, this is their bread and butter. It’s a way to speak to them.”

“We’re hearing more about higher ed in this presidential election than I’ve ever heard in any election. What that tells you is pain points for voters have reached a crescendo,” Palmer said.

“For all politicians, particularly Democrats, this makes sense in their worldview, because it’s reached that pain point for young people, for parents, for the middle class.”

Correction: A previous version of this article misstated Sen. Klobuchar’s role on the Joint Economic Committee.