Congress responded to public demand for lower student loan interest rates, and passed legislation which ties borrowing rates to T-bill prices (USAToday reports).
On the one hand, it's generally a favorable change to tie interest rates to market conditions rather than the whims of politicians. Students will benefit from lower borrowing rates, and save a bit of money on their education overall.
There are a few costs worth keeping in mind, though:
1. Student loan rates are fixed by that year, but can change in between years. Imagine a first-year student starting in 2016, who decides to borrow at 3.9% (the current rate). Then, the next year, suppose the economy picks up and interest rates jump by 10%. With one year of sunk costs, that student might decide to keep borrowing at the higher rate... Even though, knowing that in advance, he/she might have decided to avoid the cost of college altogether. Varying interest rates are risky when you might have to borrow each year of a 4-6 year education.
2. The education market is heavily state-controlled currently. Does one bit of liberalization really help that much? In particular, students cannot discharge student loan debts in bankruptcy. More students taking loans means more potential debt servitude in the future, and the Federal Government is a tough creditor to satisfy.
I can see it now: in 10 years, this policy results in many students suffering from worse debt. Then critics say "look, we tried the market solution and look what happened!" I'm cringing preemptively now....
Liberalization or privatization is often good, but not always when the rest of the relevant market is bound up in red tape. I'd call the student loan reform a potential step in the right direction, but also one fraught with future stumbling blocks. To really help students, we should be rethinking our overall education system - perhaps with a change toward vocational education, as Bryan Caplan recently suggested.