Massachusetts Democratic Sen. Elizabeth Warren introduced legislation this week that would increase federal student loan subsidies by lowering interest rates for a year and funding them through the Federal Reserve.
The bill is called the Bank on Student Loans Fairness Act, and represents Warren’s solution to the student debt crisis. It would set interest rates for federally-subsidized student loans at 0.75 percent for one year.
The current interest rate is 3.4 percent, but will double on July 1st unless Congress intervenes.
The Federal Reserve would fund the loans, according to the bill.
“The Federal Reserve would make funds available to the Department of Education to make these loans,” according to a fact sheet on Warren’s website. “While the Federal Reserve would now provide funding, the Department of Education would continue to administer all other aspects of the federal subsidized Stafford loan program in the same manner as it currently does.”
For Warren, the bill is part of her longstanding criticism of big banks and their cozy relationship with the Federal Reserve. If banks can borrow money at low interest rates, so should students, she said.
“If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy, surely they can float the Department of Education the money to fund our students, keep us competitive and grow our middle class,” said Warren in a speech on the Senate floor on Wednesday, according to Politico.
But several experts warned that Warren’s bill was financially unsound.
“It’s a complete irrelevancy to compare student loan interest rates to Federal Reserve loan-to-bank interest rates,” said Alex Pollock, a fellow at the American Enterprise Institute, in an interview with The Daily Caller News Foundation. “It’s an attempt to increase taxpayer subsidies for student loans by undercharging on the interest rates.”
Dr. Jenna Robinson, a spokesperson for the John W. Pope Center for Higher Education Policy, agreed with Pollock, and said there were good reasons to offer students and banks separate interest rates.
“Since students have no previous credit history, they present more risk than other borrowers,” she wrote in an email to TheDC News Foundation. “In order to protect the taxpayers’ investment, student loan rates should remain higher than those for other borrowers.”
Robinson noted that student federal loans had a high default rate of 13 percent.
American students now owe more than $1 trillion in collective unpaid loan debt — a hole far deeper than the nation’s credit card, mortgage, and automobile debt.
Tinkering with the interest rates won’t solve the problem, and the lower rate in Warren’s bill could actually worsen it, said Pollock.
“It would increase the student loan bubble,” he said. “What needs to happen instead is to not promote debt but to promote more efficient and lower cost education.”
If anything, the federal government should encourage students to borrow less, wrote Robinson.
“In the long run, less borrowing will be better for both students and taxpayers,” she wrote.
Megan McArdle, a special correspondent for The Daily Beast, noted that since Warren’s bill is unlikely to pass, it is probably intended as a mostly symbolic protest against big banks.
“As such, it’s probably going to be quite effective,” wrote McArdle. “But only among people who don’t know much about the banking system.”
The bill is the first that Warren has introduced on her own, without a co-sponsor.
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