Our senior Senator, Elizabeth Warren, has made a major splash with her first piece of legislation, the Bank on Students Loan Fairness Act. I know when I got her email about it I thought it was novel approach and knocked down two birds with one stone – both good for debt-laden students while pointing out how cheap the big banks were getting loans from the Federal Reserve. Giving kids who want an education the same rates that the big banks borrow at sounded like justice.
The proposal has no doubt lit up the progressive blogosphere and online community. According to Wonkblog, 385,000 signatures have been collected on liberal websites in favor of the legislation. That is testament to Senator Warren’s profile and popularity. Few can rally the liberal base better than she can. I just got another email from Democracy for America today to sign on in support of it.
And when it was filed, many of us here on BMG praised her proposal as exemplifying the reason we elected her to office. But the more I read about her proposal, the more I question whether it does represent what I saw in Warren and why I was so keen on her entering the Senate.
Thing is, the basis of her proposal, while sounding pretty good, may not actually make a lot of policy sense.
Wonkblog had this to say about it:
Probably the most high-profile plan comes from Sen. Elizabeth Warren (D-Mass.), who proposes to set the subsidized rate at 0.75 percent for a year, the same as the Fed’s discount rate at which it lends to banks. That’s a bit of a bizarre comparison, since discount loans are generally overnight as opposed to student loans that last decades, and are actually a penalty rate that banks generally don’t like to use (they loan to each other at a third of that rate).
Brookings had this to say about it:
Sen. Warren’s proposal should be quickly dismissed as a cheap political gimmick. It proposes only a one-year change to the rate on one kind of federal student loan, confuses market interest rates on long-term loans (such as the 10-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and does not reflect the administrative costs and default risk that increase the costs of the federal student loan program.
Warren also has made claims that the federal government is making a profit on student loans when that has been widely questioned. In her floor speech on the bill she said:
Some have argued that we can’t afford to keep interest rates low. But let’s be clear: Right now the federal government is making a profit from our students. Just last month, the Congressional Budget Office calculated that the government will make $51 billion this year off student loans.
In an article written by Jason Delisle, the Director of the Federal Education Budget Project at the New America Foundation, he takes her to task for this claim:
Senator Warren is not telling the whole story here either. She points to figures that the non-partisan Congressional Budget Office says “do not provide a comprehensive measure of what federal credit programs actually cost the government and, by extension, taxpayers.” In fact, when the budget office “accounts more fully… for the cost of the risk the government takes on when issuing loans,” itreports that Subsidized Stafford loans – those made to low-income students – cost taxpayers $12 for every $100 lent out, or $3.5 billion per year. If the loans cost $3.5 billion a year when the governmentcharges a 6.8 percent interest rate, cutting the rate to 0.75 percent would more than triple that cost.
The claim that the government makes money on these loans is even more dubious given that the Department of Education estimates that 23 percent of the Subsidized Stafford loans it makes this year will default. That puts it among the riskiest loan programs that the federal government runs.
Turns out that the CBO calculates the “profit” made by the government on loans in a completely ridiculous way. So Warren’s claims from the Senate floor may not really stack up afterall.
Now maybe/probably Warren knew this stuff and figured the proposal was a good way to bring focus to the issue anyway. She would not be the first Senator to champion a cause with some loose use of facts. Heck, that is the Republican modus operandi. And, if we lowered rates as low as she proposes and the federal government lost tons of dough on those loans in the short-term maybe that would not be such a bad thing, as Matt Yglesias from Slate has pointed out.
But what I worry about is whether Senator Warren starts to look a bit empty with proposals like this and reduces her credibility because of it. What I always liked most about her was that, beyond her ability to connect, she brought real expertise and detailed knowledge of the financial system to the Senate – at a time when is was desperately needed. I pictured her digging into fights on regulatory arcana, unearthing Wall Street chicanery that others missed and schooling her bought-for colleagues in debates on the vagaries of modern finance.
No doubt this proposal doesn’t mean she hasn’t or won’t do all those things. I respect her ability to bring attention to the issues. And maybe in the dysfunctional Senate of our times, winning a debate on facts is not realistic and scoring some political points for our side is all that can be expected.
But I guess I want Senator Warren to be not only good on the issues, but also right about them too. Don’t just tell me what I want to hear or want to believe. I fear Bank on Students makes for a nice soundbite that will make liberals like me feel happy. Let’s let the Tea Party’s acolytes play that game. I expect more from our side. Senator Warren, you have much more to offer our country than preach-to-the-choir soundbites.
Precisely because of her background I trust she knows what she’s talking about. If she’s good at messaging and framing in the process so much the better. Our current sorry state of affairs is largely due to the fact that the other side has done so well at that and our side has ceded the messaging wars time and again.
Elizabeth Warren has to be the most artless Senator.
Leave it to the money-men to ridicule her understanding of their sophisticated schemes, but the truth is she has exposed the weak reasoning behind big student loans and big financial intervention from the government.
Don’t listen to these creeps Lizzy you are on the right track.
All of this criticism misses the point. This is a stimulus proposal, pure and simple. Lower student loan interest for a year means more money to buy things that will help the economy. Yes, the numbers are arbitrary. So what? Some arbitrary amount of stimulus is better than $0.
It looks like the author of the column doesn’t understand what discounting means in terms of calculating net present value. Discounting isn’t reducing the expected return by the number of defaults you have. That’s factored into the expected return itself. Discounting is about the value of money over time. Because you could invest that money some other way, you “lose” money by investing it in a way that’s not optimally profitable. But you’re not losing money in the sense most people think of it. You’re just making less than you could have. So in that sense, yes, the government does lose money on student loans. But in the sense most people think of when they talk about losing or making money, Senator Warren is right. Student loans are profitable for the federal government.
Which is what you are when you create a national conversation about subsidizing needy students’ education by pegging the issue to broad-based public resentment of how we subsidize the most powerful banks in the world.