Because she cares about the right things:
The Massachusetts Democrat introduced a bill Tuesday which would let students pay the same interest rate on their government loans as banks.
Student loan interest rates are set to jump from 3.4 to 6.8 percent in July. Warren said banks can borrow from the Federal Reserve at an interest rate of less than 1 percent.
The degree to which our political culture, business culture, and educational culture has abandoned young adults is just obscene. Banks know they’re an easy mark. Politicians have left them with austerity budgets and an austerity economy.
Colleges jack up prices, leveraging the dream that an – their extra-premium education – is worth any cost; and use their financial aid to attract the wealthy rather than the best qualified:
U.S. colleges such as Boston University are using financial aid to lure rich students while shortchanging the poor, forcing those most in need to take on heavy debt, a report found.
…
The research analyzing U.S. Education Department data for the 2010-2011 school year undercuts the claims of many wealthy colleges that financial-aid practices make their institutions affordable, said Stephen Burd, the report’s author. He singled out schools — including Boston University and George Washington University — that appear especially pricey for poor families.
Thanks to our new Senator for starting to chip away at this corrupt edifice of student finance.
From your link
from the Hill
So is what the bill is proposing is that they will only provide this rate for one year? And the banks are paying this rate for one year, so maybe that’s what they are getting at. It seems imprudent for the government to loan money to students over a 10 or 15 year time frame based on one year rates. Also it’s unlikely that banks with access to the Fed window would be defaulting in the next year, while we know that some % of the students are going to default and that risk needs to be built into the the rate.
It drops the interest rate for one year, so basically it’s a form of payment relief, though the phrasing make it sound like new loans.
I wonder where she gets this number
So the US lends a dollar and gets $0.36 ? I guess she’s referring to 3.6 cents a year for ten years. My bank is getting more than that from me. Seems pretty reasonable, especially considering my 3.87 cents per year is secured by a house.
http://www.philly.com/philly/blogs/consumer/Elizabeth-Warrens-modest-proposal-Students-pay-same-rate-as-banks.html
Student loans can’t be dropped due to bankruptcy (see below). There’s no reason that the Fed should be making any more money on the backs of student loans than they make loaning money to (private) banks. The 6.8 percent isn’t derived from a risk analysis rolled into a present value equation. It’s a political number, and it should be lowered.
That the 0.75% rate is for overnight loans that must be repaid daily, that must be 100% collateralized and their is no cap on how high that rate can go.
I am old enough to remember when the Fed overnight rate was over 18%.
I too think is is good our new Senator is starting to chip away at this corrupt edifice of student finance.
That being said, this is legislation by sound bite and is not a serious proposal. Not promising for her first bill.
(I’m putting the comment here, but it could also go beneath jkw’s comment below).
It seems to me that financiers could easily have a look at student loan repayment rates. They could even look with higher granularity, based on institution, academic discipline, amount of debt, etc. The Feds could then set up the student loans so that Uncle Sam breaks even.
Should the interest rate be fixed or float? Well, we’ve got financiers who know how to make that tradeoff too! I think that there’s some real benefits to fixed rate loans when folks are planning the next 10 years of their lives. Of course, a fixed rate loan is risky, so generally comes with a higher interest rate than one with a floating interest rate.
Ultimately, the treasury shouldn’t profit from the interest on student loans. Figuring out the (fixed and variable) interest rate and other terms of the loan which make that work should be the job of civil servants, not the Senate.
The system they had 10 years ago had floating rates, but you could lock in a fixed rate any time that you wanted to. There was a slight interest rate bonus for doing this when you graduated. Floating the rate in general, but letting people lock when they graduate is much more fair than having a long-term fixed rate. Rates were higher in 2006 than 2009, but people who graduated in 2006 had an easy time getting jobs. In general, the old system gave people higher rates on their loans when they graduated into a strong economy and low rates on their loans when they graduated into a recession. But during the 2001-2004 recession, congress decided rates were unfairly low and set the rate at a fixed 6.8%. Then during the most recent recession, they realized that was too high and lowered the rate on undergraduate loans to 3.4% for a few years. The problem with fixing a rate forever is that the same rate for everyone is not actually a fair policy.
Of course, another option would be to charge some moderately high interest rate and then rebate the interest annually if the treasury makes a profit. But that would be very complicated and would treat people who graduate into recessions the same as people who graduate into a booming economy.
because student loans can’t be discharged in bankruptcy.
Sure, if the student dies and the parents aren’t co-signers (and the student has little or no assets), they money won’t be repaid. That’s pretty rare though. College loans — particularly for students attending not-for-profit schools — are a very sure bet. There’s just no reason to charge students 6.8 percent when the Fed is loaning money at 1 percent.
http://www.ed.gov/news/press-releases/first-official-three-year-student-loan-default-rates-published
and I think that the “default” in that article is for non- (or under-?) payment of the monthly premiums during that period.
But that doesn’t discharge the loan — it just means that the debt piles up.
I think I likely used the wrong word when I wrote “default” two posts up. I believe that people don’t pay for a while, but they pay sooner or later. Instead of “default” above, perhaps there’s a better word for never-end-up-paying?
I can’t find anything stating that this applies to graduate loans. They’ve been at 6.8% for a while now. For whatever reason, no one ever discusses graduate loans when they talk about this issue.
Sucks for me. If I had gone to law school right out of college, my loans would be at about 2.5%. Whoops! I am now at the “low fixed interest rate of 6.8%” (this is the language on the Stafford website). Low compared to what?
A few thoughts:
* substantially fewer graduate students than 2 and 4 year undergrads
* some fraction of the grad students are covered via research grants
* some fraction of the grad students are covered via employer reimbursement
* professional degree programs [e.g. law, medicine] have graduates who are perceived to make a very good living afterward — it’s not true for every graduate, but it’s true for many, making it harder to argue to subsidize those loans.
So I’m not arguing that they shouldn’t be eligible for the same rate, just observing that it might be a tougher row to hoe.
It still stinks.
As far as the professional programs, the higher rates are forcing people into jobs they don’t want and keeping them there longer than planned. Also, in recent years, law graduates have experienced huge unemployment and underemployment rates.
I think the 6.8% rate doesn’t really make sense for anyone. The federal government should treat these loans as investments that will be paid back with a better, more productive workforce (and all of the benefits that come with that) rather than pure financial gains [they should also cover admin costs]. The Dept. of Education expects to earn $33.5B on student loans this year. They get 64 cents in revenue for every $1 loaned out to graduate students.
It is low compared to average interest rates in the 70’s and 80’s. It is a high rate compared to just about any time period other than those two decades. The problem is that most members of congress were doing most of their borrowing in the 70’s and 80’s, so they think those are normal interest rates. Stafford loans were at a floating rate that was capped at 8.5% until sometime around 2004, when Congress was concerned about subsidizing student loan interest rates that were getting down to 2%.
The loans really should be moved back to a floating rate, tied to government borrowing rates. When the economy is bad, rates drop. When things pick up, rates go back up. The government could lend the money at 1% higher than its own borrowing costs. If we go with the ten-year rate, that would put student loans at 2.77% right now. This wouldn’t be a subsidy, since it would still be giving the government 1% over its cost of borrowing (which should cover the administrative costs). Or the loans could be floating at the federal funds rate, which would allow the federal reserve to have more of an impact when it changes rates.
At any rate, members of congress have proven that they are not qualified to set interest rates because they have no idea what counts as a high or low rate.
Why would a college be luring the rich with their financial aide packages? Isn’t the idea that rich can afford it on their own and as a bonus help fund aid for the less well off? Also, I cringed a bit when the article appeared to be critical of merit aid. I appreciated mine thank you very much and I thought the whole idea of getting ahead was that if you applied yourself, did well in school (ie merit) it shouldn’t matter what your financial circumstances are because your hard work will pay off in the form of this kind of assistance among other things. (Of course, I did all that and am chronically underemployed making me a bit sour on the so-called American Dream.)
He should cut an ad saying he supports Warren’s proposal and will fight with her for Main Street and against Wall Street in the Senate. Can’t hurt and will certainly help get the students out to vote.
I’m not sure he or anyone else has to jump on every bandwagon at least in trying to lead. Different legislators have different priorities, areas of expertise, etc., and that’s fine and I would say desirable.
I think that Markey need not cut an ad on it for teevee, but should emphasize his support for it whenever hanging out with students or their parents.
But I read the article as saying that colleges were specifically offering merit aid to students who would pay full price, rather than based solely on merit.
Basically, since we’re going to be getting 60k a year from you if you attend, verses substantially less if a poorer student attends, we’ll give you a 5k “merit” scholarship, to sweeten the deal.
Warren should just start right out proposing the rate she thinks makes sense, e.g. the rate on a federal ten-year bond, etc. Using the overnight bank rate is just a populist drum to be beaten. And beat it she has with the attendant press hoopla–“Don’t pay any more than the banks that nearly brought us to our knees!” We don’t need our new US senator dumbing down the discussion. She was a Harvard professor, for God’s sake. Would that nonsense pass for argument in a faculty seminar? I doubt it.
This is not a very impressive first effort. Warren wanted a seat on the banking committee. Where is she in the most important banking regulation issue on the table today, too-big-to-fail?