The prospects for slashing the interest rates on student loans have dimmed considerably. The Chronicle of Higher Education reported this morning that the president has announced his opposition to the bill currently working its way through the House. A copy of the president’s full statement is here. Although the president did not come out and say he would veto the bill, that appears to be a distinct possibility.

I am all in favor of cutting interest rates on student loans, but I also recognize there is no free lunch here. Someone has to pay. In a post earlier in the week, I raised the question of exactly who will pay for this. Today’s N.Y. Times reports the following:

The rates would drop from 6.8 percent to 3.4 percent in stages over
a five-year period under the House proposal. That would cost nearly $6
billion, according to the Congressional Budget Office.

To
avoid increasing the deficit, the bill’s cost would be offset by
reducing the yield on college loans the government guarantees to
lenders and cutting the guaranteed return banks get when students
default. Banks also would have to pay more in fees.

Cutting through the rhetoric, it appears that the lenders would ultimately bear the costs. Proponents of the interest-rate cut say that the student-lending industry could easily afford it. Its loans are federally subsidized and carry little risk. For example, student loans are generally not dischargeable in bankruptcy. I see that point, but we’re talking about a 50% rate cut. The target interest rate of 3.4% would be below the yield on a 10-year U.S. Treasury note, which stood at 4.7% this morning. Sure, student loans are profitable products for lending institutions, but are the returns so dramatic that the industry could absorb a 50% decrease on its interest rate?

UPDATE (1/19/07): This bill has passed the House on a 356-71 vote. It is now pending before the Senate Committee on Health, Education, Labor, and Pensions. The bill’s status can be tracked through the Library of Congress’ THOMAS service.