Federally subsidized student loan rates are set to rise from 3.4 percent to 6.8 percent unless Congress acts. But Senator Elizabeth Warren (D-MA) wants to skip that debate and get the answer to another question: Why should students pay higher interest rates than banks?
Under Warren’s new proposal, students would pay the same discount rate financial institutions get from the Federal Reserve.
“Right now, a big bank can get a loan through the Federal Reserve discount window at a rate of about 0.75%,” Warren said on the floor of the Senate Wednesday, according to her prepared comments.
“But this summer, a student who is trying to get a loan to go to college will pay almost 7%. In other words, the federal government is going to charge students interest rates that are nine times higher than the rates for the biggest banks — the same banks that destroyed millions of jobs and nearly broke this economy.”
The immediate likely objection to such a proposal from Republicans is that this is new government spending in a time when we need to reduce our deficit — which is falling at a record rate. Warren will point out that the Treasury profits from student loans. The student loan reform that was passed along with the Affordable Care Act eliminates banks from the loan process and returns their former profits to taxpayers beginning in 2014.
“Some may say that we can’t afford this proposal,” Warren said. “I would remind them that the federal government currently makes 36 cents in profit on every dollar it lends to students. Add up all of those profits and you’ll find that student loans will bring in $34 billion next year.”
Massachusetts’ senior senator points out that the American public saved the big banks, which Attorney General Eric Holder admitted are “too big to jail.” A Bloomberg report suggests taxpayers offer an implied $83 billion subsidy to the biggest banks, with an implied guarantee in case of another financial crisis.
The Century Foundation‘s Benjamin Landy explains that this crisis is likely “driven by borrowers who graduated or entered the job market at the height of the recession and have now reached the end of the maximum three-year deferral period allowed under the federal loan program.”
In other words, students stricken by the worst of the financial crisis are now badly in need of a bailout. And Senator Warren is one politician who has a plan to do that responsibly: Just treat students with the same generosity we offer the big banks.
AP Photo/Cliff Owen