Senator Elizabeth Warren, the architect of the Consumer Financial Protection Bureau, introduced a bill in Congress to give student borrowers a break. The premise is that students, whose education is important to the economic growth of the United States, should receive some of the same advantages as banks, who receive preferential treatment in the form of low-interest loans from the Federal Reserve.
Since the midst of the recession, the Federal Reserve has kept its overnight lending rate low, below 1 percent, so banks could kick-start the economy by being able to afford to borrow. Overall, this strategy hasn’t worked. The financial industry instead used low-cost loans to increase their assets in their financial reports, an important move to show institutions were well capitalized, and to continue to pay executive bonuses despite upsetting short-term performance.
Money is fungible — you can’t track each dollar of business revenue and each dollar of loan and determine which dollar was used for which expense, but you should be able to expect banks to cut back on excesses during periods when the industry is being carried on the backs of taxpayers. After all, when taxpayers pay for public teacher’s salaries, newspapers publish salary tables and citizens are critical of waste in the system; you should expect the same scrutiny when taxpayers are footing the bill, at least temporarily, for financial industry CEO bonuses.
A well-educated populace is good for the economy and for this country’s competitiveness on a global stage, so it makes sense for those who have pursued a college degree to receive some benefits of economic stimulus. Students are leaving college is a low-employment environment. Half of the jobs added over the past few years have been low-paying jobs, and as a result, more people — not just recent graduates — are underemployed.
The interest rates for federally subsidized student loans is set to double to 6.8 percent this July. Every year, Congress goes through the same theatrics, and more often than not decides to lower this rate. Students who take out student loans today receive a favored rate of 3.4 percent. That’s a better deal, certainly, but not as good of a deal that banks receive, somewhere near 0.75 percent.
Elizabeth Warren sees this as an injustice. She says: “… [O]ur students are just as important to the economic recovery as our banks, and the debt they carry poses a serious risk to that recovery.” This isn’t wrong. Students saddled with high repayment obligations after college have less money to contribute to the economy right away. They’ll wait before getting married, before having children, and before moving into their own houses. Even income-based repayment plans, where your monthly student loan bill is reduced, don’t help in the long run.
Students bear responsibility for borrowing only what they can afford, but that depends on them having effective guidance. Student loan guidance before borrowing is completely ineffective.
Furthermore, society continues to push the idea that education is worthwhile regardless of the cost. I’m a strong believer in the importance of life-long education, which for me includes degree programs, but not in borrowing at any cost. Everyone should be able to afford a college education, but perhaps we shouldn’t subsidizing as many students who choose to attend expensive private schools rather than the more reasonable state colleges and universities.
To receive those interest rates of 0.75 percent, banks have to put up collateral. Student loans are somewhat riskier than loans to banks. First, these are overnight loans for the banks — very short term, very low risk. Student loans live for a decade or more, and students have a stronger chance of being unable to make the payments. That leads to higher interest rates — those who dutifully pay back their loans in full help subsidize those who have problems.
Yet, a student loan is the only type of borrowing that cannot be discharged in a bankruptcy, and that helps reduce the risk to lenders (while making life difficult for some borrowers).
Warren is looking for a reduction of the student loan rate to 0.75 percent for just one year, at which time Congress would need to vote again.
My gut reaction is that Warren is right — it’s not “fair” that students have to pay more to borrow money than banks. There is a solid economic for the difference in rates, though. There’s no question that a well-educated populace is better for society, so what could the government do to help students without increasing risk to lenders?
- Perhaps there needs to be a more discriminating table of interest rates for student loans rather than one rate for everyone. Each student’s own situation, including proposed course of study and society’s need for jobs in a certain industry, should be evaluated to determine interest rates on an individual basis.
- Perhaps there should be more student loan repayment assistance for those who graduate and take a job in a sector that is in high demand.
- Another option is for there to be more policies that encourage private organizations to offer education grants and scholarships.
Policies for students ignore the bigger problem of the skyrocketing cost of education. You can’t control costs when society is continually making it easier for more people to afford college. Educational institutions need to control enrollment, and they can do that by raising the sticker price. The more free and low-cost credit is available to students, the more colleges can raise tuition without damaging their enrollment.
In the end, the problem of education affordability is multi-faceted, and while I would vote for a bill such as this myself, I don’t expect Congress to pass it. I expect they will continue to do what they usually do: lower the interest rate from 6.8 percent, but without going as low as 0.75 percent.
Updated July 5, 2013 and originally published May 14, 2013.