http://www.masslive.com/politics/index.ssf/2013/05/sen_elizabeth_warrens_first_bi.htmlDemocratic Massachusetts Sen. Elizabeth Warren on Wednesday introduced her first standalone bill in the U.S. Senate – a bill to lower student loan interest rates.
If Congress does not act, interest rates for newly issued subsidized Stafford loans are set to rise from 3.4 percent to 6.8 percent in July. Warren wants to prevent that raise, and lower the rates even further, to a "discount rate" given by the Federal Reserve to banks, which currently stands at 0.75 percent.
Warren’s bill comes as Congress is starting to discuss whether to freeze student loan interest rates and how to pay for it.
Warren, who sits on the Senate Banking Committee, has been a sharp critic of big banks and their role in the financial crisis. In remarks on the Senate floor, she contrasted the government’s approach to student loans with the government’s approach to banks.
“Right now, a big bank can get a loan through the Federal Reserve discount window at a rate of about three quarters of one percent. But this summer a student who is trying to get a loan to go to college will pay almost 7 percent,” Warren said. “In other words, the federal government is going to charge students interest rates nine times higher than the rates they charge the biggest banks – the same banks that destroyed millions of jobs and nearly broke the economy. That isn’t right.”
A study by U.S. PIRG, which opposes the doubling of student loan interest rates, reported that the government is expected to generate $36 billion in revenue in 2013 from student loans, if the rates increase. (This includes a variety of loans, most of which generate more interest than the federally subsidized Stafford loans, which help low-income students.) Doubling the interest rates on new subsidized Stafford loans would cost the average student an additional $1,000 over the life of the loan per year of school, according to the U.S. PIRG report.
Warren’s Bank on Students Loan Fairness Act would let students who are eligible for federally subsidized Stafford loans borrow at the Federal Reserve discount rate for one year, while Congress works on a long-term plan.
“We shouldn’t be profiting from our students who are drowning in debt while we’re giving great deals to big banks,” Warren 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.”
However, economists point out that there is a difference between the Federal Reserve rate and student loans. The discount rate, officially called the “primary credit” rate, is the rate at which the Federal Reserve loans money to banks. The rate is higher than the federal funds rate, the rate banks would pay when they loan each other money, so banks typically take out the loans only for short periods, for example an overnight loan to cover an overdraft in their accounts.
“The federal funds rate involves virtually no risk at all because it’s short term and it’s bank to bank lending,” said Russ Thibeault, president of Applied Economic Research in Laconia, N.H. “Student loan rates, however, there is risk involved…. Therefore the market is expecting student loans to carry a higher rate.”
Thibeault said Warren’s proposal would amount to an additional federal subsidy for student loans. “Right now, it’s politically palatable because the Fed is keeping rates artificially low to stimulate the economy,” Thibeault said.
Warren’s proposal is not the only one out there to adjust student loan interest rates. Democratic President Barack Obama, in his budget, proposed pegging student loan interest rates to annual market rates, so student loan interest rates would change along with the rates government is paying to borrow money, Bloomberg Businessweek reported. That means student loan interest rates would be lower now than under the current fixed rate but would rise as the economy improves.
Another bill pending in Congress, sponsored by Rep. Joe Courtney, a Connecticut Democrat, would freeze the student loan interest rate for two years. That bill has 123 co-sponsors, all Democrats.
U.S. Rep. Richard Neal, a Springfield Democrat and member of the House Ways and Means Committee who co-sponsored Courtney’s bill, said he “likes the concept” Warren is proposing and opposes the scheduled rate increase, though he has not yet backed her proposal or Obama’s. “When you put a proposal forward, you’re putting an item in the marketplace of ideas, and from there you try to find the way forward,” Neal said.
Neal said he wants to see some way of keeping student loan interest rates low and hopes Congress can find common ground. He said increasing the interest rate makes it more likely students will have trouble repaying their loans, and student debt is already a “drag on the economy,” with student debt now larger than credit card debt in America. With the federal debt coming down, revenues rising, housing stabilized and interest rates at record lows, Neal said, “I think we could find a way to provide an opportunity for students and that’s what we need to do, not to burden them with additional fees.”
Rory O' Sullivan, director of policy and research for Young Invincaibles, an advocacy group for young Americans that co-wrote the U.S. PIRG report, was noncommittal on Warren’s proposal, but said the group looks forward to working with Warren to keep rates low. "We're glad Senator Warren is bringing the student loan interest rate issue front and center by proposing a bill that would keep rates low for students next year,” O’Sullivan said. “Senator Warren asks the right question: how is it that students are paying much higher interest rates than other borrowers of federal loans?”
Whether or not Warren’s proposal gains traction, it could call attention to discussions over the student loan interest rate. Congress in 2007 cut interest rates for subsidized Stafford loans from 6.8 to 3.4 percent, but only for four years. The rates were set to rise last July, but with the 2012 election looming, lawmakers reached a bipartisan compromise to extend the lower rates for a year. Freezing the rates cost an estimated $6 billion, which was paid for by changing rules related to how companies fund employees' pensions and by limiting the duration of some student loans.
