Government policies affecting student loans and interest rates

Government Policies

Four policies the government has created: Economic growth and productivity

Student loans

The purpose of student loans is to make education more affordable for the average American. The premise behind student loans is that students will borrow to pay their education, get a better job, and then pay off the costs of that education later in life, after they have attained financial solvency. However, this happy scenario does not always transpire. A shaky economy makes repayment of student loans far from certain. Furthermore, student loans do not level the playing field as much as one might assume. Students from wealthier backgrounds do not need to balance work and school. They can take internships over the summer to build their social networks, rather than take mindless jobs simply to pay for books and other aspects of schooling not covered by government loans. True, students can always choose to go to a state school or less competitive university at a lower cost, but it is difficult to find a 'free' education. Moreover, going to a lower-quality school can shut one out of the social networks and knowledge base of elite institutions. This contributes to the inequality manifest in America.

Instead of extending student loans, the government should offer more financial support to all universities, to reduce the price of tuition, or offer grants to students of high academic caliber. The best foreign universities in Europe and Canada are far less expensive than America's most elite institutions. By truly expanding access to education, America could become a more literate and socially equal society, and with superior knowledge the overall quality of the labor force would be improved and spur long-term productivity. Students like myself would be able to avoid the culture of debt endemic to our society early in their working lives, and could take more socially meaningful jobs upon graduation, rather than the best-paying job they could find to pay off their student loans.

Interest rates

To stimulate the economy, the Federal Reserve Bank lowers interest rates to encourage spending rather than savings. During the credit crisis and subsequent recession of 2008, the Fed lowered interest rates to historically low levels. This was supposed to help consumers with their mortgage payments, encourage consumers to purchase 'big ticket' items like cars and large appliances, and encourage businesses to hire more workers, to meet the presumably increased level of consumer demand. Of course, the Federal Reserve had been criticized for its past policies of making it so easy to borrow money that many prospective homebuyers took our complicated mortgages on homes they could ill afford. However, the economy is believed to be in such dire straits, that the Fed's current policy is seen as essential.

In terms of my own life, as I do not have a mortgage, the decline in interest rates did not affect my cost of living. I do not have a prohibitive level of credit card debt because I am worried about the state of the current economy and my future job prospects. It would seem unwise to take out a large loan for a car or other item, no matter how low the interest rate, if I might need that money for basic necessities in the near future.

However, some people might regard my decision as unwise: after all, what 'goes up, must come down,' and interest rates will inevitably go up. I may regret not borrowing now, if I have to pay a higher rate on a car payment in the future. On the other hand, given that the low interest rates and economic stimulus have not has a seismic effect on job growth, I am still wary about spending too much, despite the fact that money in a savings account with a low interest rate is actually 'losing' value, because of the inevitability of inflation. My uncertainty about borrowing for anything other than what I absolutely need (other than student loans, which is 'spending' that does not directly result in higher levels of production in enterprise and takes me out of the full-time labor force) means that the government must find more direct ways to stimulate job production, other than cutting interest rates.

'Cash for clunkers' and other rebates

Specifically engineered government programs, such as 'cash for clunkers' clearly had an immediate stimulatory effect -- when people knew that they had only a short period of time to take advantage of a car rebate, they acted as quickly as possible. Since I was not in the market for a new car, I did not, and this raises the question if people who participated in the program were genuinely motivated to buy new cars or if consumers intending to buy cars simply made the purchase several months before they might do so otherwise. In other words, car sales might plummet in the upcoming months to compensate for the recent, artificially engineered rise in demand. To truly have a more meaningful impact upon demand, a year-long 'cash for clunkers' program with a smaller rebate might have encouraged consumers who suddenly needed a car to buy a new rather than a used vehicle.