This is Sen. Elizabeth Warren’s first piece of legislation to address the doubling of interest rate from 3.4 to 6.8. Elizabeth Warren wants to float the student loan interest rate to the discount market rate. You can listen to her introduction of the bill here or an interview with media here. I’m probably biased but I think her reasoning is impeccable. Why should the government allow banks to borrow at low interest rates but students at rate 9 times higher? Can someone think of a reason why this would NOT be acceptable to everyone? I also would be OK with the reverse, too: if the discount market rate was tied to the student loan interest rate. Overall, the government shouldn’t be making a profit on students (>$30 billion a year), when, in reality, those students are going to get jobs and contribute to the economy.
I think it’s a terrible idea. And I think Elizabeth Warren is smart enough to know that.
For one, what connection is there between the Fed discount window and long-term consumer-loan rates? The former are very short-term, emergency loans to banks that put up collateral for the “privilege” of borrowing at such low rates. It’s not like it’s a gift; it’s sort of a “last resort” kind of deal. So with that in mind, how can you apply that to student loans? You have to price in default risk and loan-servicing expenses, at a minimum.
I’m all in favor of it being easier to get an education. The one thing I’m worried about, though: The market rate for interest is low right now, but will it always be? Could this bill end up increasing the rate for student loans, sometime in the future?
I’m going to have to go with this being a horrible idea. The reason these type of loans have such low interest rates is that there is effectively a zero chance of default. That is blatantly not true of student loans. If you wish to argue that student loans are important enough to the economy to operate at the significant lose this would create, why not just give out interest free loans instead? At least that would be an honest approach. This is nothing more than shameless pandering by Sen. Warren and it saddens me. I expect better of her than this kind of nonsense.
I think this is the genius of Sen. Warren’s bill. She assumes a truism: banks have and will always get best deal for government money no matter what circumstances. Sen. Warren is simply tying student loan debt along with that.
When market interest rates are low (as they are now), it would indicate a real, economic need of an educated and skilled workforce, by encouraging students to borrow. In contrast, when interest rates go up, it would discourage students to borrow.
I don’t think you are understanding how the discount window works. It is NOT a primary source of liquidity. Any loans taken from the Fed are secured by collateral. It is an emergency measure to preserve liquidity in extraordinary situations. They don’t borrow from the discount window and then make auto loans or shit like that.
Well, it’s a shame that the collateral that the banks were forced to put up did not avert a global recession. So, the collateral must not be that good. As for pricing the default risk: how much do you think a single, college-educated person yields in taxes to federal and state governments during their lifetime? I hate to answer a question with a question, but my point is that when you’re a nation, you invest in your citizens, who will, in turn, invent and discover things as well as get jobs that will increase the economic activity.
<shrug> It doesn’t matter how many student defaults because the government is making money by loan-sharking students, so clearly, the ponzi scheme still has a lot of steam in it.
But here, let me try arguing this another way that you might find better: When a government making money off their students is a government that has grown too big, too costly, and too overbearing toward the cause of liberty. How’s that
The discount window has nothing whatsoever to do with the crisis. The fact that you"re conflating them does not put your understanding of this topic in a good light. As for the collateral, it is required to be greater than the loan. Again if the college loans are so important, why not make them interest free?
Banks borrowing from the discount window did not cause the global recession. Ironically though, what you advocate here DID have a hand in causing it: money that got way too cheap.
Apparently not enough, in aggregate, if the deficit is any indication.
Now, if you or Sen. Warren want to argue for a student-loan-rate cap, or a market-rate structure, or something like that, I’m all for it. But this proposal is nonsensical, and I suspect little more than political posturing.
I don’t think this is true. She is proposing to float the student loan interest rate with the market rate. The market rate is not always “lower interest rate”, in fact, if you look in the 80’s, it crept up to 20%. The problem I have is that many of you seem to suggest that there is very little economic benefit to an education or that the financial industry provides more of an economic benefit than education. I cannot help but to wholeheartedly disagree. It seems obvious that education of one’s workforce leads to economic property, not the reverse. I would challenge you to find an example where this is true.
Not true. The deficit is what it is today is because U.S government has been running peacetime deficits in the 1980’s by repeatedly cutting taxes over and over again. The deficit should be an indication of the U.S populace lack of appetite for any new taxes not that an educated workforce isn’t producing enough economic activity. In fact, if you would like an example of this, the last time a party balanced the budget, they lost the Congressional majority for over a decade. That should tell you how much Americans hate taxes and what they will do to Congress (and the President for that matter) if they dare to raise them.
It’s not about the value of education vs. banking, it’s risk. I get why we subsidize student loans, but now we have a bubble situation, so steps have to be taken to deflate it in as orderly a fashion as possible. Inflating it more is what current public policy is. We need to stop loaning money to students who aren’t in majors that are likely to enable them to pay the money back, and we need to stop loaning to institutions with low return on investment. The President has already discussed doing this for some for profit schools whose degrees don’t turn out to be worth much.
How can you estimate that the students are studying majors guaranteed to make them pay the loan back? How do you calculate which students will be able to pay back their loans and which won’t? Will there be caps on the number of students who can apply for student loans under that program? What will happen to those students? What happens when the student projects that the amount they’ll need is X, but due to tuition increases or loss of other incomes, they realize the amount has changed drastically?
BTW, student loans are supposed to die with the student, but student loans affect credit and the only reason they are “defaulted” is because the former student does not have a job that pays enough to pay back a significant monthly portion of the loan.
I do agree with the limiting the role of for-profit schools (IMHO, they shouln’t exist).