Every Month a CPEG member will be posting a brief issue analysis for discussion and comments. This month’s discussion piece was authored by CPEG’s newest member, Luis Diaz-Perez. A little more about Luis can be found in the “About Us” section of our site.
A college education was once synonymous with self-advancement and independence. Now, a college degree might be more appropriately associated with debt and dependence. Individual lives, not to mention national growth and development are being buried beneath $1 trillion of student loan debt. This calamity, already greater than American credit card or car loan debt, is scheduled to become even more pitiless after July 1. That’s when interest on federal student loans doubles to 6.8%. But this piling on doesn’t have to be. Thanks to Sen. Elizabeth Warren’s first stand-alone bill, S897 – the Bank on Students Loan Fairness Act, a remedy is at hand that doesn’t just attack the metastasis, it also offers a prescription for broader economic wellness.
Thirty-seven million Americans owe an average of $25,000 in school-related loans, while the federal government will make $34 billion on student loans this year. Those studying in graduate and professional schools often finish their academic preparation six figures under. When college grads do find jobs, they are often underemployed in menial work, and of course hobbled by debt. Whether they default or not, their prospects are darkened before they even get started. As a result, countless young people are delaying marriage, starting families, saving money, spending money or buying homes. In sum, they are forced by student loan indebtedness to put their lives on hold, depriving the nation and the economy of their vitality. Getting our economy back on track means getting our people back on track, and S897 promises to help a sector poised to contribute its dynamism.
Succinct, at less than 600 words, the Bank on Students Loan Fairness Act would simply:
prevent the doubling of the interest rate for Federal subsidized student loans for the 2013-2014 academic year by providing funds for such loans through the Federal Reserve System, to ensure that such loans are available at interest rates that are equivalent to the interest rates at which the Federal Government provides loans to banks through the discount window operated by the Federal Reserve System, and for other purposes.
This approach would drive rates down to 0.75%, which is what banks pay for money at the Fed’s discount window. If the banks can get money from the Federal Reserve at less than one percent, why shouldn’t students who after July 1 might pay nearly ten times in interest what the biggest banks pay? You remember the big banks; they are the ‘persons’ who helped wreck the economy, casting millions into unemployment. Who are more creditworthy; students working hard to prepare themselves to contribute to the real economy and society, or banks addicted to derivatives and the practices of casino capitalism?
Because Sen. Warren (and House co-sponsor John Tierney, D-Mass) wants the Federal Reserve to make funds available to the Department of Education for student loans, these costs won’t come out of the Federal budget, the Treasury or through taxation. Instead, her proposal converts the Fed’s enormous credit-making capacity into a tool for assisting the American people and economy.
While the bill only covers Stafford Loans, excluding other programs such as Federal Direct Student Loans, Perkins Loans or PLUS Loans typically taken out by parents, S897 is an important first step towards freeing young people from the onerous financial obligations blocking many from becoming educated, contributing members of society. As important as this step is, the bill’s wider significance lies in requiring the Fed to do something for the everyday economy, not just the banks.
If other federal departments, states and even local units of government could avail themselves of cheap Federal Reserve credit, then financing for the kinds of investments that will lead to sustained economic recovery would be within reach. For instance, the Department of Transportation could emit very-low-interest, long-term bonds for investments to bring the national rail system up to world standards. School and hospital construction to energy and water system modernization (or insert your pet project here) could be renewed if the touchstones of a modern, competitive economy were afforded the treatment now only granted banks at the Fed’s discount window.
The bill faces difficult odds. The predictable array of Wall Street interests, the White House and congressional leadership are already lining up in opposition. Because it was only introduced last month, the opportunity to turn commencement ceremonies into supportive rallies has largely passed. Nonetheless, several colleges and universities, especially those in Warren’s student-rich Massachussetts have come out in support. But other institutions of higher learning, especially those on whose boards sit financial titans, should be pressured to get behind S897. If these board members can’t support this bill, then they are not truly friends of higher education. While the banks may jealously guard their privileges, the general public should have no problem seeing the great virtues of this legislation.
CPEG urges its friends, and friends of higher education, economic recovery and fairness to join the push behind the Bank on Students Fairness Act – an affirmative step towards getting our students out of debilitating debt and our country on the road to recovery.
Sen. Warren’s Fact Sheet
Sen. Warren introduces the bill
A partial list of supporters
Fed report: Household Debt and Credit: Student Debt
Student loan facts from American Student Assistance