House bill 1049, allowing community colleges to opt out of a federal loan program for students, passed the House yesterday afternoon 75 votes to 42 despite arguments from the opposition who claimed that it would limit access to a good education for the state’s low-income residents. The bill was proposed by Rep. Brisson (D-Waden, Cumberland) at the request of the community colleges. The bill specifically applies to about half of North Carolina’s 58 community colleges.
The bill was proposed in the wake of a 9 percent default rate for community college students. Opponents of the bill contend that, without the bill, the school’s financial aid officer can still discourage students from taking loans if he/she feels that the student does not understand the responsibilities that come with taking on the debt or if the student simply does not need the loan for academic purposes. They also argued that the low interest rates that the federal loans provide give students the opportunity to attend community college while offering them a better chance of paying back the loan in the future.
The bill’s supporters say that they are simply fixing a mistake that was made in the past when the General Assembly made it mandatory for schools to participate in the federal loan program. Under the new law, the boards of trustees of the various community colleges could decide for themselves whether or not they want to participate in the program.
The debate over this bill can be put into the greater context of the student debt crises facing our country. More and more graduates are defaulting on their loans as they have difficulty finding lucrative employment after college. Many argue that the federal loan program, precisely because of its low interest rates, encourages students to take on debt that they cannot repay.
Student loans are considered a high-risk investment by those who recognize that it is poor practice to lend money to people who have built up no credit history and who currently have little income. Usually, high-risk loans come with high interest rates. The low interest rates on student loans do not adequately reflect the amount of risk involved in the investment. This encourages more loans to be handed out, as lenders and students are misled into thinking that there is little risk. A similar situation developed with the housing crises when interest rates on mortgages were artificially lowered to encourage more people to buy houses that they could never pay for.
Setting such low interest rates for student loans would be like a car insurance company giving free insurance to adolescent males who are notorious for getting into car crashes: it’s a bad business practice that would never pay off. But that’s what happens when government decides to help the underprivileged by providing students with cheap money – it does them more harm than good.